Indonesia's growth forecast trimmed

The World Bank has warned Indonesia it faces increased risks this year from domestic factors.

The agency warned of moderate investment growth, and potential soaring inflation that could undermine the consumer purchasing power needed to propel the consumption-reliant economy.

In its economic quarterly report titled “Pressure Mounting” released on Monday, the World Bank cut its 2013 growth forecast for Indonesia to 6.2 per cent from 6.3 per cent. 

Investment was likely to face some drag from ongoing failure to address regulatory issues, policy missteps and general uncertainty surrounding the outcome of the upcoming 2014 elections, said the report. 

“Indonesia also continues to face stiff competition from other economies in the region for export-oriented investment at a time when labour costs, at least for minimum wage workers, have risen significantly,” the report said.

The World Bank said that investment growth – touted by Finance Minister Agus Martowardojo as the main growth driver this year, replacing consumption – might fall to 8 per cent of gross domestic product, as compared to 9.8 per cent in 2012. Halving investment growth to 5 per cent in 2013 would reduce real GDP growth by about 1 per cent.

Investors, according to the agency, have also been monitoring measures restricting trade and increases in protectionism that have coincided with policymaker concerns on moves to ease current account deficits and rupiah depreciation. 

The agency argued that it would be important to ensure that policy responses to Indonesia’s external account dynamics avoided counterproductive and unintended consequences, such as raising investor risk perceptions when gross external debt financing needs were significant, reducing competitiveness by increasing domestic prices, or hampering exports which rely on imported inputs. 

“New firms, whatever their size, are most likely to improve job creation and productivity growth rather than old firms,” World Bank economic advisor and lead economist for Indonesia Ndiame Diop said. “It’s important for you to open new markets to do business. Make it easier for new investors to enter the market. That would bring the highest payoff for economic growth.” 

Investment Coordinating Board (BKPM) chairman M Chatib Basri, however, remained upbeat, arguing that prevailing uncertainties in developed nations benefited Indonesia, as companies looked to emerging markets as investment alternatives. “A moderation in investments may occur, but I don’t think it will be significant. Overall, 8 per cent growth against GDP in our investments can still be considered as relatively good,” he said.

Foreign direct investment rose by 3.2 per cent in 2012 over 2011, as measured by Bank Indonesia, and by a larger 26 per cent according to the BKPM.

The report also highlighted recent inflationary trends that might weaken domestic consumption, which drives around 60 per cent of the nation’s economic growth. 

Inflation soared to a 20-month high of 5.3 per cent in March, nearing the central bank’s forecast of 5.5 per cent. 

The World Bank warned of additional pass-through effects of imported inflation from sustained weakness in the rupiah: “Pass-through from the weaker rupiah exchange rate was limited in 2012 but will likely continue to feed through into consumer prices with a lag, and sustained currency weakness would compound this.” 

The World Bank also raised caution on the rupiah exchange rate, given the continuous rise in gross private external debt exposure that has exceeded public external debt for the first time. Some 87 per cent of the nation’s private external debt is denominated in US dollars.