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Indonesia’s economy continues to grow, but it is important to enhance Indonesia’s resilience to shocks given the weak external environment and uncertain outlook
Jakarta, December 14, 2011 – The latest Indonesia Economic Quarterly released today by the World Bank says that despite continued turbulence in international financial markets, Indonesia’s economy continues to perform strongly and remains relatively well-positioned to weather future external shocks. However, a freezing up of international financial markets – or a severe, prolonged downturn – could have an adverse impact on portfolio flows, commodity prices and both external and domestic demand.
Indonesia’s real economy continued to perform strongly in the third quarter, with real GDP increasing by 6.5 percent year-on-year for the third consecutive quarter. Private consumption growth remained strong as did real export growth, albeit slightly down relative to the second quarter. FDI inflows declined in the last quarter but remained relatively strong, and are well above the average FDI inflows seen over the past two years.
However, due to weaker global growth prospects and continued global uncertainty, the World Bank’s baseline 2012 growth forecast for Indonesia is being lowered to 6.2 percent, marginally down from a projection of 6.3 percent in the October. The growth forecast for 2011 remains unchanged at 6.4 percent.
“The near-term outlook for the global economy remains one of substantially weaker growth in high income economies, moderating commodity prices and continued turbulence in financial markets. Because of the natural resilience of its economy, Indonesiais well-positioned to navigate this turbulence. But there is a risk of more adverse scenarios sparked by a freezing up of international financial markets that could lead to a severe, prolonged downturn, in major emerging economies, and Indonesia needs to be adequately prepared for such scenarios,” says Shubham Chaudhuri, Lead Economist for the World Bank in Indonesia.
In terms of bracing itself against the near-term impacts of possible future shocks, the Quarterly report highlights the important steps Indonesia has taken to improve crisis preparedness, such as increasing the flexibility of any fiscal response and the creation of a government bond stabilization framework. The Quarterly also notes that it is now an opportune time to move forward with investments and reforms which can enhance domestic productivity and growth and attract more stable and longer-term capital flows.
On the production-side, manufacturing continues to perform strongly. Recent GDP growth has been accompanied by robust job creation, with non-agricultural employment up 5.4 percent in the year to August 2011.
“There are many reasons to be optimistic about Indonesia's manufacturing sector, like the rapidly growing domestic market and low labor costs compared to other countries in the region. This has led to a significant increase in investment – both domestic and foreign – in Indonesia,” says World Bank Country Director for Indonesia, Stefan Koeberle. “Moving forward, steps to improve access to finance, infrastructure and labor regulations will need to be taken to support the future growth of the manufacturing sector and related services sectors. These measures will help create jobs with higher productivity and wages, and absorb the two million Indonesians entering the labor force each year.”
