Indonesia: Fluctuating investment and high subsidy spending impede higher growth potential, says World Bank Report

Jakarta – Fluctuating investment growth, reflecting lower export prices and tighter financing conditions, as well as regulatory uncertainties, will continue to moderate Indonesia’s growth rate to 5.3 percent for 2014, says a new World Bank report.

Policy reforms are key to supporting growth, which at 5.7 percent for 2013 has fallen from 6.5 percent in 2011, reports the March 2014 edition of the Indonesia Economic Quarterly.

“Forward looking public policy making would consolidate Indonesia’s economic success.  These policy adjustments include redirecting high subsidy spending to more pressing needs such as increasing infrastructure investment, improving the investment climate, and improving service delivery at the local level” says World Bank Country Director for Indonesia Rodrigo Chaves.

In 2014, subsidy spending is expected to increase to approximately 2.6 percent of GDP, compared to 2.2 percent of GDP in 2013, and above the current 2014 budget allocation.

 Meanwhile, recent policy and regulatory developments, including the partial ban on mineral exports, have heightened uncertainty for long-term investors and add to budget pressures. The World Bank estimates that the ban will negatively impact net trade by USD $12.5 billion and result in USD $6.5 billion of losses in fiscal revenues (royalties, export taxes, and corporate income tax) for three years starting from 2014.

“Positive signs are emerging in global growth.  But challenges remain for Indonesia, including flat terms of trade, higher interest rates and policy uncertainty. In light of ongoing economic risks and Indonesia’s ambitious development agenda, minimizing regulatory uncertainty and sustaining reforms should be a priority ,” says Jim Brumby, World Bank Lead Economist and Manager of the Poverty Reduction and Economic Management unit.

The marked narrowing of the current account deficit in the last quarter to USD 4.0 billion shows that tighter monetary policy and exchange rate flexibility are working.

However, the drag on trade from the mineral exports ban and subdued commodity prices lead the World Bank to project only a modest narrowing of the current account deficit for 2014 as a whole, to 2.9 percent of GDP compared with 3.3 percent in 2013.  The majority of the contribution to the improved trade balance over the past year has been through reduced imports.