Indonesia and South Korea have signed a provisional agreement to develop a light rail transit (LRT) system in the Southeast Asian country, Industry Minister Airlangga Hartarto said on Thursday (09/11). (Antara Photo/Yulius Satria Wijaya)

World Bank Warns Asia-Pacific Nations of Increased Economic Risks


APRIL 14, 2017

Jakarta. The World Bank has warned economies in the East Asia and Pacific region of risks that cloud the region's positive outlook, advising governments to take measures to strengthen policy and institutional frameworks to increase productivity.

"Developing East Asia and Pacific continues to do better than most of other developing regions," Sudhir Setty, chief economist for East Asia and the Pacific at the World Bank, told reporters on Thursday (13/04).

Setty cited the World Bank's latest report, "East Asia and Pacific Economic Update: Sustaining Resilience," which states that the Chinese economy is likely to slow down gradually to a more sustainable pace of 6.5 percent this year and 6.3 percent in 2018 and 2019.

Growth in developing East Asia and Pacific economies – including Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Cambodia, Laos, Myanmar, Mongolia, Fiji, Papua New Guinea, the Solomon Islands and Timor-Leste – excluding China is expected to reach 5 percent this year, 5.1 percent in 2018 and 5.2 percent in 2019.

The report said Indonesia's economy will likely grow by 5.2 percent this year, 5.3 percent in 2018 and 5.4 percent in 2019 as commodity prices strengthen and credit growth continues to respond to looser monetary policy, and the impact of fiscal consolidation dissipates over time.

The bank lowered its April projection for Indonesia by 0.1 percentage point, compared to its previous estimation in October, reflecting marginally lower-than-expected growth in 2016 and weak retail sales in January this year.

World Bank economist Dhruv Sharma said the lower projection was largely "mechanical" and that the focus must be on Indonesia's prospect of growing slowly but steady in 2019.

"These positive prospects, we think, are clouded by significant global and domestic vulnerabilities," Setty said.

He said the US Federal Reserve may increase its interest rate more rapidly than expected, which could lead to capital outflows and increase financial volatility in the region. He added that there is also risk in rapid credit growth and possible vulnerabilities that may have been built up both in the corporate sector and in households.

"These could spill over to the banking sector of these economies and slow growth in the medium term," he said.

Setty warned that a possible slowdown in trade due to rising protectionism and weaker-than-expected growth by major trading partners in the medium term could hurt the region, which is one of the most open to international trade. He added that fiscal deficits and public debt levels in the region would likely remain high.

In Indonesia's case, Setty said the government needs to evaluate spending on health and education so it will free up resources for other needs with greater developmental impact, such as infrastructure and social assistance.

"I think the basic point here is that one of the striking points of Indonesia is that there is no lack of money being spent on health and education [...] What is striking is how little benefit those expenditures bring in terms of actual outcomes at the local level," he said.

"So, it's not a question necessarily of cutting back. It's a question of ensuring that what spending there is, produces the result it was meant to achieve," he said.

The government pegs expenditure on health and education at 5 percent and 20 percent of the budget, respectively. It has allocated Rp 104 trillion ($7.8 billion) for health care and Rp 416.1 trillion for education in the 2017 state budget.

A total of Rp 387.3 trillion has been allocated towards infrastructure.

The World Bank's full report is available here.