Indonesia’s Strong and Stable Outlook

Indonesia’s Strong and Stable Outlook
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By Thee Kian Wie

Despite slower global growth and continued uncertainty in the global financial market, Indonesia’s economic growth remained strong throughout 2012.

Indonesia’s GDP, while slowing down slightly, still grew by 6.2 per cent year-on-year (yoy) during the third quarter of 2012, which was slightly lower than during the second quarter, due to the continuing slower growth of exports.

According to projections by the World Bank, Indonesia’s major trading partners are estimated to grow by 3.3 per cent by the end of the year and by a slightly higher 3.6 per cent in 2013, which will improve the prospects for higher export growth.

But looking forward, with a still uncertain outlook for the world economy, Indonesia must prepare itself for the potential adverse consequences of China’s economic slowdown and additional falls in commodity prices, and for the possibility of renewed turbulence in financial and commodity markets.

Also according to World Bank estimates, Indonesia’s GDP is projected to grow by 6.1 per cent in 2012 and will likely grow by 6.3 per cent in 2013. Inflation remains subdued and is estimated to reach around the mid-point of 4.5 per cent, plus or minus 1 per cent for 2012.

Consumer price index inflation in October 2012 was recorded at 0.16 per cent (month-to-month) or 4.6 per cent yoy, while administered and volatile food inflation was 2.8 per cent yoy and 6.7 per cent yoy, respectively.

Core inflation remained contained, although it rose slightly to 4.6 per cent yoy, which was mainly caused by inflation in housing contracts and rent prices. Core inflation was contained by lower imported inflation in line with lower global food and energy prices and a relatively stable rupiah.

On fiscal policy, the Indonesian government continued to pursue sound macroeconomic policies in 2012, with a strong commitment to fiscal consolidation aimed at a steady decline in its debt-to-GDP ratio to around 24 per cent this year. Meanwhile, the government’s budget deficit is estimated to be only -2.2 per cent in 2012, and a lower -1.6 per cent in 2013.

Over the course of this year, the main driver of Indonesia’s growth was domestic demand, mainly coming from private consumption and investment. Looking ahead, Indonesia’s economic growth is expected to rise due to strong private consumption and investment.

During the third quarter of 2012, realised investment increased by 25.1 per cent compared to the same period in 2011. Total realised direct investment during the third quarter of 2012 was IDR81.8 trillion (US$8.45 billion), consisting of IDR25.2 trillion (US$2.6 billion) of domestic direct investment and the rupiah equivalent of IDR56.6 trillion (US$5.9 billion) of foreign direct investment.

During the third quarter of 2012 Indonesia’s balance of payments recorded a US$0.8 billion surplus, while the current account deficit declined to 2.4 per cent of GDP from 3.5 per cent during the second quarter of 2012.

This year’s improvement in the current account balance was associated with an improved trade balance; imports fell, while some export commodities (for example, coal and palm oil) continued to grow.

During the fourth quarter of 2012, the overall balance of payments is estimated to record a higher surplus, supported by a lower current account deficit and an increasing surplus in the capital and financial account.

By the end of October 2012, foreign exchange reserves amounted to US$110.3 billion, which is equivalent to 6.1 months of imports and the government’s external debt service payments.

In its November 2012 press release, the Fitch ratings agency affirmed the Indonesian government’s sovereign credit rating at BBB- with a stable outlook. Fitch stated that the key factors supporting the decision to affirm Indonesia’s sovereign credit rating were Indonesia’s relatively high economic growth, which could weather the declining global economic conditions, its high investment rates, falling public debt ratios and Indonesia’s strong macroeconomic policy framework.

However, Fitch’s main analyst, Philip McNicholas, noted several concerns: Indonesia’s low average incomes, its dilapidated physical infrastructure and widespread corruption.

Moreover, he noted that Indonesia’s external finance and government revenues are still below the BBB median, and the relatively high share of foreign currency-denominated debt leaves Indonesia’s public finances exposed to currency fluctuations. These concerns will continue to be relevant in Indonesia over the coming year.

* Thee Kian Wie is senior economist at the Economic Research Centre, Indonesian Institute of Sciences, Jakarta.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.

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