31st August 2013.

Indonesia is now facing a more challenging global environment with commodity prices falling, and slowing growth in the major emerging markets which is impacting on export performance with its major trade partners in these markets.

Many emerging market countries are beginning to be affected by the reversal of stimulus packages in developing countries, particularly the USA and this is resulting in a major shifting in financial conditions, an example of this is the currency concerns in the Indian economy. In addition Indonesia is feeling the impact of an increase in net oil and gas imbalances and intensifying external imbalances.

Due to the above:

  1. 1.The current account deficit is expected to continue to widen to around 3.5% of GDP in 2013.
  2. 2.GDP growth is expected to slow to around 5.25% in 2013 due to sluggish demand and the investment outlook. This is down from previous GDP growth in excess of 6%.
  3. 3.Headline inflation is projected to rise to 9.5% (year-on-year) ending 2013 when fuel price adjustments are factored in, although expectations are it will ease back to 6% in 2014.

Risks will, also emanate out of deeper than expected slowing of growth in emerging markets accompanied by a more adverse attitude by investors to these markets. This could increase external pressures and exacerbate imbalances in the Indonesian economy.

Steps to address these concerns:

             The Central Bank of Indonesia has increased its policy rate to 7% as at the 29th August 2013 in a bid to contain the fiscal deficit (government spending is exceeding revenue – this does not take into account debt factors).

             Policy implementation by the government to contain the fiscal deficit through the major fuel price adjustments in June 2013.

Monetary policy will be a need to focus on anchoring inflation expectations with moves to rein in the

current account deficit and moves to ensure there is a healthy reserve buffer (foreign exchange).

This needs to be supported by fiscal policy which needs to be underpinned by additional tax and

subsidy reforms and the provision of adequate space for social and capital spending which should

also include health protection in 2014. These actions need to be supported by continued flexibility in

the exchange rate and bond yields to absorb shocks.

In summary there is a continuing need in Indonesia for more structural reform which will help

reduce bottlenecks, broaden the export base and increase employment growth to facilitate

greater regional and global integration.

Priorities are more infrastructure investment, a more open and predictable trade and investment outlook and reduction of labour market rigidities.

Source: Selected data from the IMF and Bank Indonesia

John Brooks MAEs

Trade Economist

The Auspacific Institute