World Bank Cuts Indonesia’s Growth Forecast to 5.2%

Spring Meeting 2018 - Photo by World Bank

JAKARTA (TheInsiderStories)—The World Bank revised down the projection of Indonesia’s economic growth to 5.2 per cent from an initial forecast of 5.3 per cent, citing volatility in global financial markets and disruptions to international trade.

“We project that Indonesia’s GDP will grow by 5.2 per cent by 2018,” World Bank Country Director for Indonesia and Timor-Leste Rodrigo A. Chaves said in a press release regarding the World Bank’s June 2018 Indonesia Economic Quarterly on Wednesday (06/06).

The normalization of US monetary policy followed by other developed countries causes volatility in global financial and capital markets. The US Federal Reserve is expected to hike its interest rate by two or three more times this year.

Monetary policy tightening by the US Federal Reserve could trigger volatility and raise borrowing cost in the emerging economies.

In addition, the risk of trade protectionism can also disrupt international trade which will affect Indonesia’s exports. Declining exports will certainly hamper Indonesia’s economic growth.

The global trade is increasingly threatened after the US President Donald Trump imposed import tariffs on steel products by 25 per cent and aluminium products by 10 per cent from Canada, Mexico, and European Union. The rate is effective on June 1, 2018. This policy prompted retaliation which could escalate into a global trade world.

The World Bank projection is below the Indonesian government’s economic growth target of 5.4 per cent in 2018.

The World Bank noted Indonesia’s economy grew by 5.1 per cent in the first quarter of 2018, lower than 5.2 per cent in the fourth quarter of 2017. The figure is slightly different from the National Statistics Agency that reached 5.06 per cent in the first quarter of 2018.

Chaves mentioned the commodities price spikes actually bring positive impact to the investment in Indonesia, especially investment in machinery, equipment, and motor vehicles.

“As a result, gross fixed capital formation grew by 7.9%, the fastest in more than five years,” he added.

The investment in machinery will increase the import twice than the export. As a result, the export will slow down the economic growth.

The World Bank predicts the private consumption growth remains flat at 5 per cent, although there are early signs of retail sales recovery. Meanwhile, the current account deficit in the first quarter reached 2.1 per cent of GDP, lower than 2.3 per cent of GDP in the fourth quarter of last year.

However, the World Bank stated Indonesia has strong macroeconomic fundamentals that continues to provide a solid buffer against rising global volatility. The prudent economic management has kept the country’s inflation low and the debt levels at only half of the legal threshold.

Educational Reform

The World Bank’s June 2018 Indonesia Economic Quarterly report also reviews the impact of 15-years of educational reform on improving educational outcomes and human capital in Indonesia, as well as the challenges. The report showed Indonesia’s student achievement outcome is still below its regional peers although school enrolment rates have grown significantly. This condition hurt Indonesia’s competitiveness in the global economy.

Lead Economist for the World Bank in Indonesia Frederico Gil Sander said Indonesia needs more educational reform immediately to improve the education quality. A large number of teachers who will retire in the next decade will be a great opportunity to improve teaching staff in Indonesia.

“Only with ongoing efforts to improve the quality of learning outcomes, secondary and higher education graduates will have the skills necessary to find employment in a changing labor market,” he added.

Key recommendations for further education reform include defining and applying teacher qualifications; complement existing educational financing mechanisms by more targeting performance-based transfers for schools and underdeveloped areas; as well as launching a national campaign to raise public awareness to contribute to improving the quality of student learning.