World Bank’s latest assessment of Indonesia’s economic growth – How bleak is the future for the country?

On July 02, 2013, World Bank’s lead economist, Mr. Nidame Diop, gave the latest economic assessment of Indonesia, where the pace of the country’s economic growth, as measured by the Gross Domestic Product (GDP), is expected world bank reportto ratchet down from approximately 6.2 percent to 5.9 percent. A survey by many economists polled has called for an average rate of economic growth for 2013 to be approximately 6.0 percent. Mr. Diop was attending a World Bank-organised event held in Jakarta, Indonesia where he was quoted as saying that, “The government has the tools to respond to a sustained global slowdown, but the downgrading of growth is based on our observations of how the economy grew, an anticipation of what is happening in the global market and the pressures we see domestically,” he then went on to say that, “You see a slightly slowing growth momentum.”

The latest economic assessment by the World Bank came at a time after Indonesia’s parliament has put out a revised Budget forecast for economic growth in 2013 at 6.3 percent two weeks ago. Incidentally, around that time, on June 21, 2013, the Indonesian government decided to end its fuel subsidies, where the price of subsidised gasoline was increased by approximately 44.0 percent to 6,500 rupiah (USD 0.65) a litre, while diesel was 22.0 percent higher at 5,500 rupiah a litre. One of the petrol-pricesobjectives for ending the fuel subsidies was to narrow the country’s current account deficit which has been widening due to the ongoing capital flight out of the country, and other emerging economies following concerns over the US Federal Reserve’s (US Fed) moves to slowly taper out of its USD 85.0 billion a month monetary easing programme, and the Indonesian government was hoping that the move might strengthen to value of the Indonesian rupiah in the face of the ongoing global capital flight out of emerging markets during that period.

The ending of the fuel price subsidies was a contentious issue among many Indonesians where a majority of its people are living under the poverty line, and is one of the world’s most inhabited populations of Muslim people. Weeks before the June 21 ruling by the Indonesian government to end fuel subsidies, several disgruntled

Indonesians across the country vented their anger by holding mass rallies, protesting against the expected moves by the government, however the Indonesia parliament did not relent, and continued to maintain their firm stance on this issue. In an online Bloomberg article dated June 22, 2013, the Indonesian Coordinating Minister, Hatta Rajasa was quoted in a briefing saying that, “The Indonesian government needs to take steps to boost the country’s economy, and in line the revised budget, the government decided to take the step of adjusting fuel prices, realising that this will affect inflation and Indonesian people’s purchasing power.” The ending of the fuel price subsidies does not come as good news for many Indonesian households who are not only coping with the ongoing inflation, but the potential impact of further price increases it has on the cost of basic necessities, such as cooking oil, etc. during the upcoming Ramadan (Fasting) month which falls in July this year, and ends on August 08.

The latest World Bank economic assessment on Indonesia does give investors some pause regarding the true fundamentals of the economy which at one point attracted vast amounts of foreign capital inflows following the upgrading of the country’s credit outlook by many credit rating agencies. The Indonesian economy was also one of the major countries that many fund managers look to add into their watch lists for potential upsides in time to come due to its wide pool of cheap labour availabilities, presence of foreign direct investments (FDI), and the vast amounts of mineral resources the country is Indonesian currencyendowed with. However, as history repeats before, emerging economies such as Indonesia do face the risks of volatile capital flows, as seen by the massive deleveraging across the global economies during the final weeks of the first half of 2013. The Indonesian government and its central bank (Bank Indonesia, or BI) has implemented various measures including the latest fuel price hikes and the unexpected interest rate hike announcement by BI in late June 2013 in order to forestall the rapid devaluations of the Indonesia Rupiah, but efforts so far could not alleviate the pace of capital flight especially when the slightest hint of US Fed tapering sent global markets into wild tailspins across the board.

Going forward, I believe that some credit has to go to the Indonesian government for ending the fuel subsidies and its goal of restoring economic stability on a firmer footing. It is also quite remarkable that the Indonesian government did not bow down to any demands coming from the Indonesian people following the ending of the fuel price subsidies on June 21. The Indonesian government does understand the impact of such policy moves have on the plight of many Indonesian households and their livelihoods, but in order to sacrifice the country for short-term pain for long-term gain, the Indonesian government is willing to settle for a slower pace of economic growth, while ensuring that the economic sustainability of the country is being maintained at all times, taking into account the fact that, should there be any prolonged delays in implementing tough economic policies, it might jeopardise the country’s economic future.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc