- POSTED: 07 Oct 2013 21:00
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The World Bank has cut its economic forecast for Indonesia for this year and for 2014. But despite a slowdown in commodity exports, the situation could spur development in other business sectors.
JAKARTA: The World Bank has cut its economic forecast for Indonesia for this year and for 2014.
Weaker commodity prices, tighter global liquidity and slowing domestic demand are the main factors causing the slowdown.
However, the Indonesian government has initiated some proactive strategies to reinforce core economic resilience and long term stable growth.
The pace of Indonesia's economy expansion has slowed down this year and is unlikely to pick up again until next year. That is the view of the World Bank -- which predicts economic growth of 5.6 per cent, down from the 5.9 per cent estimated in its previous quarterly report.
Slowing exports have been dragging Indonesia's economy this year but despite a slowdown in commodity exports, the situation could spur development in other business sectors.
World Bank’s lead economist for Indonesia, Ndiame Diop, said: "This softening of commodity prices not only provides an environment for investors to invest more in manufacturing but also to invest more in the downstream segment of the commodity prices because one of the difficulties of moving downstream is when the prices of the raw commodities are very high in global market the incentive for the private sector to invest in downstream is lower."
This development does in fact, reflect government policies designed to nurture downstream business activities.
The government's decision to reduce energy subsidies will better protect Indonesia from fiscal risks in the short term, as well as free up spending for infrastructure and social programs.
Indonesia is perceived as a large and resilient economy -- thanks to the government's policy adjustments such as tightening lending conditions, higher interest rates, and the depreciation of the rupiah -- which are indicative of the sense of resilience as they are not quick fixes and will take time to improve the overall economy.
The World Bank does not foresee Indonesia facing difficulties in addressing its external financing needs.
World Bank East Asia and Pacific chief economist Bert Hofman said: "Indonesia, which relies quite a bit on external financing because of its large current account deficit, is a country that could probably see a larger increase in interest rates compared to the rest and that would affect domestic demand to some extent offsetting… its election spending."
With an average of 5.3 per cent growth, Indonesia still is listed as one of the best performing G-20 countries in terms of economic growth
Among the factors that are lending core strength to the economy are a robust public sector balance sheet, low public debt over GDP and foreign reserves of more than US$93 billion.
As Indonesia approaches the 2014 elections, the World Bank believes government's steps to improve the regulatory environment, lift public infrastructure investment and social spending can help the country reinforce strong growth and maintain a favorable outlook for economic development.