World Bank Slashes Indonesia Growth Forecast

The Washington-based lender forecasts Indonesia's economy to expand 4.7 percent this year. (AFP Photo/Bay Ismoyo)

By : Tabita Diela | on 7:37 PM July 08, 2015
Category : Business, Featured

Jakarta. The World Bank has drastically cut its projection for Indonesia's economic growth this year, foreseeing the economy would expand at its slowest pace in five years as the government's slow infrastructure spending exacerbates weaker growth in consumer spending.

The Washington-based lender now forecasts Indonesia's economy to expand 4.7 percent this year, from the initial projection of 5.2 percent made late last year. That could be the slowest growth rate since the economy expanded at 4.6 percent in 2009, in the aftermath of the global financial crisis. The government itself has set a growth target of 5.7 percent for the year, while Bank Indonesia, the central bank, says it expects a growth rate of 5.1 percent.

"Since day one of the new administration, very important and ambitious reforms were announced. Unfortunately, so far, the gains from those reforms are smaller than expected and the economy is still slowing down," Ndiame Diop, World Bank lead economist in Indonesia, said in a video message published on the World Bank's official site on Wednesday.

In its latest Indonesia Economic Quarterly, the World Bank notes that fixed investment contributed 1.4 percent to GDP growth in the first quarter of 2015, or just half its average annual contribution in the period 2010-12.

The government has spent only 8 percent of the Rp 290 trillion ($21 billion) earmarked this year for infrastructure spending, holding back a large chunk of public savings — made available through fuel subsidies cuts last year — from the economy.

Meanwhile, consumer spending only grew 4.7 percent in the first quarter, down from 5.3 percent at the same period a year before. According to the World Bank, low consumer spending was due to weaker trade putting pressure on corporate profits and household incomes, which at the end slowed down demand.

Lower consumer demand led to lower imports, which were down by 14.4 percent in the first quarter of 2015. Exports in the commodities and manufacturing sectors also fell 13 percent in the same period due to lower global demand, including from China and Indonesia's Southeast Asian neighbors, the World Bank noted.

'Unfavorable conditions'

Rodrigo Chaves, World Bank country director for Indonesia said Indonesia must face “unfavorable conditions" that will lead to slower economic growth, such as continued low commodity prices and low investment growth.

"But Indonesia can respond by raising quality spending in infrastructure while containing the fiscal deficit to within the legal limit of 3 percent of GDP," he said. "Improved infrastructure will reduce logistics costs and lower prices, boosting economic growth and equity."

The drastic growth forecast cut compounded concerns over earnings of companies, which are already struggling with rising costs and a weak rupiah. The Jakarta Composite Index fell 0.7 percent to 4,871.57 after the announcement, extending a 11 percent loss from April to June period.

The rupiah closed 0.7 percent weaker at 13,346 against the US dollar on Wednesday, as the country's persistent current account deficit provides no defense against the greenback's bull trend ahead of the expected US Federal Reserve interest hike later this year. The local currency has lost 7.3 percent against the dollar so far his year, according to data from Bank Indonesia.

On Tuesday, the Asian Development Bank also revised down its forecast for Indonesia's GDP growth — to 5 percent this year from an initial projection of 5.5 percent — due to delays in infrastructure spending.

The Manila-based lender, however, maintained a rosy outlook for the medium term, saying the country has the potential to grow up to 8.7 percent annually over the next ten years.

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