Dominic G. Diongson & Tito Summa Siahaan
The World Bank has lowered its outlook on Indonesia’s economy for this year, and economists say Indonesians should brace for a possible slowdown in growth as Europe’s financial crisis threatens to curtail a global expansion.
In its twice-yearly Global Economic Prospects report released on Tuesday, the World Bank cut its forecast on Indonesia’s economic growth to 6.0 percent from a 6.1 percent projection in April, marking the second reduction this year. It had earlier forecast growth at 6.2 percent.
“What the government must do is realize that the [European] crisis is not going anywhere in the short term, so they need to better manage the risk that it carries,” said Aviliani, an economist at the Institute for Development of Economics and Finance (Indef), an independent think tank. “Businesses also have to support the government’s policies to protect the economy.”
European leaders are trying to contain a possible fallout from deteriorating financial conditions across its region. Over the weekend Spain asked for a bailout of 100 billion euro ($125 billion) to prop up its banking system, and rising bond yields in Italy threaten to push up that nation’s borrowing costs. Next weekend, Greeks will vote whether to stick with austerity measures meant to revive their economy.
For 2013, the World Bank reduced its growth forecast on the global economy to 3.0 percent from 3.1 percent. Global growth is expected to slow this year to 2.5 percent from 2.7 percent in 2011.
Anton Gunawan, the chief economist at Bank Danamon Indonesia, said the euro zone crisis has yet to reach its worst point.
“Despite that, the impact is already felt in the country, especially in the financial markets,” he said.
In the past month, the 10-year government bond’s yield rose, and the rupiah slipped to its lowest level against the dollar since November 2009. The benchmark stock measure, the Jakarta Composite Index, has fallen 8.6 percent since setting a record closing high of 4,224 on May 3. For the year, however, it is up 1 percent.
The nation’s central bank, Bank Indonesia, has been curbing its projections, citing fewer exports to Europe. On Tuesday, it forecast economic growth at the lower end of its range of 6.3 percent to 6.7 percent.
Finance Minister Agus Martowardojo said last Thursday that a decline in shipments due to the weak global economy could cast a long shadow on Indonesia’s economy, which might cause the country to fall short of its economic growth target of 6.5 percent this year.
Still, the central bank has forecast economic growth of 7 percent for 2013, higher than the World Bank’s projection.
Gross domestic product last year rose 6.5 percent, which was the most since 1996. Household spending accounted for about 60 percent of the nation’s economic activity, as low borrowing costs encouraged consumers to spend on homes, cars, motorcycles and mobile phones.
Indonesia’s economy is fundamentally sound, Anton said, but the government has committed some mistakes, including recent changes in mining policies and a possible change in foreign control of local banks. “Investors will start asking questions about whether Indonesia is worth the risk.”
Anton also called for the government to diversify its trading partners, as the country experienced a deficit in its trade balance in April, the first since July 2010.
“Indonesia is fortunate, because some of our biggest trading partners in the euro zone, like Germany and Britain, are still performing strongly,” he said. “In the future, we should look more to Southeast Asian countries as trading partners.”
To boost the nation’s economy, the government should focus on infrastructure, Indef’s Aviliani said.
“With infrastructure development up and running, I think Indonesia is relatively safe from another global financial meltdown,” she said.
The World Bank forecast that GDP in high-income countries, including the United States and Japan, would rise 1.9 percent in 2013, compared to 1.4 percent this year. It projected that growth in developing countries would pick up in 2013 to 5.9 percent, up from 5.3 percent in 2012.
Additional reporting by Muhamad Al Azhari & Aloysius Unditu