Indonesia told not to be complacent

Indonesia has no room for complacency even though it has achieved solid economic growth amid uncertainties in the global economy, the World Bank (WB) has warned.

The country’s policymakers should continue to eliminate business regulatory barriers and improve legal certainty to maintain economic growth next year, the bank’s country director for Indonesia Stefan Koeberle said recently.

External risks stemming from the fiscal cliff in the US and the build-up of debts in European countries will prompt negative sentiment among global investors next year, which could consequently drag down Indonesia’s investments, the main growth driver other than domestic consumption.

“The global economic outlook remains relatively uncertain and vulnerable to shocks, so it is not a time to be complacent,” Koeberle said in the December 2012 edition of the Indonesia Economic Quarterly. “Investment growth domestically, which has been crucial for Indonesia’s recent strong economic performance, also faces risks.”

Indonesia’s economy expanded by 6.17 per cent in the third quarter, around 40 per cent of which was attributed to investments.

Direct investments in the country topped a record high of 81.8 trillion rupiah (Bt259.66 billion) in the third quarter, jumping 25 per cent from a year earlier, according to data from the Investment Coordinating Board (BKPM).

The World Bank said Indonesia could grow 6.3 per cent next year, but warned of the possibility that investments, especially in the resources-based industry, might weaken due to prevailing economic uncertainties in the US, Europe, Japan and China. The situation would put pressure on commodity prices and thus affect Indonesia, a major exporter of raw minerals and basic commodities.

The worst-case scenario is that the US economy would shrink 5 per cent in 2013 due to the increase in taxes and the cut in government spending, thus hampering the recovery in global demand and adding the strain on Indonesia’s ex-ports, said the Washington-based institution.

The World Bank also suggested that the government avoid making policy mistakes, especially since the 2014 general election is looming and policymakers usually lean toward populist policies to strengthen their foothold. 

“Leading up to the 2014 general election, Indonesia’s business and investment policies will be under particular focus,” said Ndiame Diop, World Bank lead economist and economic advisor for Indonesia.

To ensure that investments remain robust next year, it is necessary for the country to speed up infrastructure projects and avoid making policies that add uncertainty to its business climate, he added.

The World Bank also specifically highlighted recent labour disputes plaguing Indonesia, with Jakarta recently seeing a 44 per cent increase in minimum wage after a series of demonstrations and rallies by labour unions.

Besides suggesting more transparency in the wage-setting process, the World Bank said the salary increase must be followed by an increase in productivity or Indonesia would risk having its competitiveness undermined.