Indonesia's central bank governor Agus Martowardojo told reporters on Thursday (19/10) that a rupiah exchange rate level of around 13,500 per dollar is 'competitive for Indonesia.' (JG Photo/Yudha Baskoro)

World Bank Revises GDP Outlook for Indonesia

BY :TABITA DIELA

OCTOBER 03, 2017

Jakarta. The World Bank dropped its growth outlook for Indonesia's GDP this year while maintaining its predictions for next year due to an unexpectedly dormant private consumption rate that accounts for over half of Indonesia's GDP, according to the bank's latest flagship report published on Tuesday (03/10).

The October 2017 edition of the Indonesia Economic Quarterly, titled "Closing the Gap," showed that the bank expected Indonesia's real GDP to increase by 5.1 percent this year and 5.3 percent next year. That outlook is slightly lower compared to an increase of 5.2 percent this year and 5.3 percent in 2018 as featured in the previous June report.

"Limited infrastructure has long been a major constraint for Indonesia's development," Rodrigo A. Chaves, World Bank country director for Indonesia, said in a statement.

"More and better-planned infrastructure will help the country boost growth and enable prosperity to be more widely shared," he said.

Indonesia's real GDP grew 5 percent annually in the second quarter this year, unchanged from the previous quarter.

The report noted that after enjoying a surge in the first quarter, export and import growth both slowed significantly due to lower commodity prices in the second quarter and fewer working days due to the annual Idul Fitri celebration. Lower exports took a toll on the country's current account deficit (CAD), which doubled to 2 percent of GDP in the second quarter.

Indonesia recorded favorable drivers during the period, such as strong job growth — about four million jobs were created in the year to February — double-digit wage increases, consumer confidence, declining food price inflation, a stable rupiah and the Idul Fitri celebration, which typically leads to a higher consumption. Still, consumption remained flat.

"No clear answer [on the reason of flat consumption] — some hypotheses, but need more data to discern among them," Frederico Gil Sander, World Bank lead economist in Indonesia, said in his presentation.

Sander mentioned several "most possible explanation points" to temporary causes, including short-term adjustments to constructive reforms, sluggish industrial and productivity growth, low commodity prices and "noisy" national accounts data caused by the Idul Fitri holiday that reduced the number of working days.

There are, however, some stimulus available for Indonesia in terms of both fiscal and monetary policies.

The 2017 revised state budget sets a higher fiscal deficit of 2.9 percent of GDP, up from 2.4 percent in the original budget, that will allow for more expenditures. Bank Indonesia, the country's central bank, cut its interest rates by 25 basis points in August and September simultaneously to spur growth.

The report also highlights the need for more participation from the private sector.

"Leveraging private sector investment can help Indonesia meet its large infrastructure needs more rapidly and efficiently," Sander said in a statement.

"The government has begun to take measures to address the issue, but accelerating the pace of private sector investments in infrastructure will require continued reforms," Sander said.

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