JAKARTA (TheInsiderStories) – Country Director of the World Bank Indonesia, Rodrigo Chaves rated that the government’ move to postpone some infrastructure projects that bring investment and cut imports tax deductions would not have a significant impact on improving the current account deficit (CAD) in the near future.
Chaves assessed that the steps taken by the government to deal with the CAD would instead have an impact on increasing export realization and will erode the long-term investments.
“The steps to impose tax cuts on imports and delaying public investment will not have a large impact on CAD in the near future,” he said on Thursday (20/09).
World Bank Chief Economist Frederico Gil Sander considered that one of the steps for the country survived from the global crisis was an increase in investment. He said, that with the potential investment announced by the government in the past year it could be a reinforcement of Indonesia’s economic fundamentals.
“Indonesia must continue to increase its ambitions in trade so that exports can be more competitive,” Sander said in the same location.
He said although coordinated policy measures taken have significantly increased resilience to the financial market turmoil, the low levels of exports and foreign direct investment imply that pressure from capital outflows is likely to continue.
“The current account deficit is expected to widen to 2.4 percent of GDP in 2018 and stabilize at 2.3 percent of GDP in 2019, because lower outflow of primary income is offset by a weak trade exchange rate plus investment demand for capital goods imports and decreased exports growth at major trading partners,” Sander said.
Small Possible Crisis in Indonesia
However, both Chaves and Sander assessed the current global economic conditions resulting from the American and Chinese trade wars did not make Indonesia fall to crisis. Although it was affected by the exchange rate, both of them agreed that the strengthening of economic fundamentals carried out by the government was enough to make the impact of the global crisis not significantly affect Indonesia’s economic conditions.
Chaves also rated that despite the risk of a decline in economic growth due to the global economic turmoil, the chances of a financial crisis in Indonesia are relatively small.
He said that global uncertainty due to the trade war and also the impact of the crisis in developing countries, in the midst of the US Federal Reserve’s normalization of central bank policies, had indeed led to a portfolio exit from markets in developing countries including Indonesia.
The capital outflow caused the 10-year tenor bond yield to rise 121 basis points in the second quarter to reach 8.2 percent. The Rupiah also depreciated 4.8 percent against the US dollar in the second quarter, plus 2.7 percent in July and August. Responding to increased volatility in global financial markets, Bank Indonesia raised its benchmark interest rate to 125 basis points since May 2018.
“That signals the central bank’s commitment to stability, even though 3.3 percent inflation is still below the target of Bank Indonesia,” adds by Chaves.
The risks associated with the financial crisis in Indonesia remain small because of strong policy coordination and stronger economic fundamentals, especially when compared to the 2013 Taper Tantrum period and the 1998 Asian Financial Crisis, urged by Sander.
He explained, Bank Indonesia tightened its monetary policy by maintaining the difference in its benchmark interest rate with the US, so that it was expected to be able to “tame” the outflow of capital.
From the government side, deficits and debt levels are also kept low where government debt is less than half of the threshold of 60 percent of GDP, and 57 percent in Rupiah.
“Most importantly, with a focus on maintaining stability, the government is expected to continue a tightening policy to stem capital outflows, even if it weighs on growth,” Sander said.
World Bank reported, despite heightened global uncertainty, Indonesia’s economic outlook continues to be positive. Stronger private and government consumption lifted real GDP growth to 5.3 percent in the second quarter of this year.
Supported by robust investment, stable inflation, and a strong job market, Indonesia’s economic growth is forecast to reach 5.2 percent this year and in 2019, then gradually strengthen to 5.3 percent in 2020. Risks to this outlook include the ongoing U.S. monetary policy normalization, and contagion from volatility associated with other emerging markets.
Thanks to a solid economic performance for years, Indonesia reduced the poverty rate from 19.1 percent in 2000 to 9.8 percent in 2018. Better economic opportunities, particularly in urban areas, have helped many Indonesians escape poverty and join the middle class, World Bank said.