- The global growth outlook remains weak and financial markets turbulent.
- However, to date Indonesia¡¯s growth performance has remained solid. GDP growth in the first quarter of 2012 was 6.3 percent year-on-year, down slightly from 6.5 percent in 2011 as a whole. Consumption held up well in the first quarter of 2012, investment growth came down while net exports made a negative contribution to growth.
- Indonesia is not though immune from spillovers from international developments through both the financial and trade channels.
- Falling international commodity prices, and weaker volumes, contributed to a sharp slowdown in export growth in recent months and the narrowing in the trade surplus has seen the current account move into deficit.
- Heightened international risk aversion in May was accompanied by portfolio capital outflows. Domestic asset prices declined and the portfolio outflows, plus weaker trade balance, put pressure on the Rupiah.
- Reflecting the performance seen in the year to date, the baseline outlook is for growth of 6 percent in 2012 and 6.4 percent in 2013.
- However, in the event of a major freezing of international financial markets which contributes to a drop in trading partner growth, a fall in global commodity prices and reduced domestic investor confidence, similar to in 2009, it is projected that growth could slow to 4.7 percent in 2013.
- In a scenario in which such a crisis was accompanied, or indeed precipitated, a severe, prolonged global downturn encompassing the major emerging economies, 2013 growth in Indonesia could drop to 3.8 percent.
- With risks in the global economy are high and expected to persist, emerging economies, including Indonesia, therefore face the twin challenges of enhancing crisis preparedness to deal with near-term shocks while at the same time putting in place policies to support medium-term growth in a weaker global environment.
- Good progress has been made on crisis preparation but further work is required - there is no room for complacency in the current fragile market environment.
- Indonesia, similar to other emerging economies, should prepare for a likely long period of global economic volatility and weaker high-income demand by re-emphasizing medium-term development strategies, focusing on productivity-enhancing reforms and infrastructure investment.
In addition to the economic update and outlook this edition of the Indonesia Economic Quarterly includes topical analysis of the trends in Indonesia¡¯s current account and the challenges of budget execution for government infrastructure spending. It also includes an analysis of investment in the roads sector and a discussion of the linkages between global trade and investment and domestic competitiveness.
