JAKARTA (TheInsiderStories) – Indonesia’s gross domestic product (GDP) growth could slow to 4.9 percent next year – below the government target 5.3 percent – and slide further to 4.6 percent in 2022 amid intensifying risks such as the escalating of trade war between China-United States (US), and the geopolitical tension in a number of regions, according to the World Bank report issued last week.
The assessment was one of many points discussed during a closed-door meeting between President Joko Widodo and World Bank country director for Indonesia and Timor-Leste Rodrigo A. Chaves, among other officials, at Presidential Palace.
Indonesia’s economy, which has been growing steadily at around 5.3 percent per year on average since the start of the millennium, could be dragged down as it faces downside risks associated with the increasingly clouded outlook for the global environment.
“Growth in Indonesia has been slowing and will weaken further with the global slowdown – a global recession would be damaging,” Chaves said.
The Washington-based institution also estimated that if the growth rates of China and the US fell by 1 percent, it would trim 0.3 percent off the growth of the Indonesian economy.
Indonesia’s economy, the largest in Southeast Asia, expanded by 5.05 percent in the second quarter, softening from 5.27 percent recorded over the same period last year, according to Statistics Indonesia data. The government expects the economy to grow 5.3 percent this year as stated in the 2019 state budget.
The World Bank’s bleak outlook, it explained, was driven by weak productivity and slowing workforce growth, while lower commodity prices due to the global economic slowdown would also further hurt the economy, according to the meeting’s materials.
With downside risks increasing, Indonesia could be susceptible to another episode of capital outflows, which would weaken the rupiah and drive up Indonesia’s debt paper yields. The World Bank estimated that the potential upcoming outflows could be larger compared to the outflows that occurred during the 2013 taper tantrum and 2015 yuan devaluation.
“Indonesia will suffer because of portfolio capital finances the current account deficit (CAD),” it said.
However, it continued by saying that instead of focusing on improving the CAD – an indicator widely blamed for the rupiah’s depreciation last year – the government should redirect its efforts to improve the investment climate to attract more foreign direct investment (FDI).
“The main recommendation to the Indonesian government is that in the current environment, the best way to protect Indonesia is by financing the CAD through FDI as opposed to portfolio inflows,” Chaves said after the meeting with Widodo.
Responding to the World Bank’s assessment, Finance Minister Sri Mulyani Indrawati said the government must remain vigilant in its monitoring of the risks for the domestic economy, and vowed to continue fostering an investor-friendly environment.
“At the end of the day, foreign capital will look for a safe place. So, if Indonesia can show that we are a good place with stable growth and prudent management, capital will pour into the country,” said the former World Bank managing director in Jakarta on Friday.
The Office of the Coordinating Economic Ministry’s deputy head for macroeconomics and finance, Iskandar Simorangkir, said the World Bank was quite conservative in its assessment of Indonesia’s CAD outlook.
“In the second quarter of 2014, our CAD reached 4.26 percent of GDP but we were fine. The World Bank is conservative even though our economic fundamentals were solid,” said Iskandar, referring to the time when Indonesia’s CAD passed the 3 percent threshold deemed safe by the central bank.
Bank Indonesia (BI) senior deputy governor Destry Damayanti said separately that while Indonesia had welcomed around Rp170 trillion (US$11.97 billion) in portfolio inflows so far this year, it would be better for the country if FDI also rose to safeguard the domestic economy from a sudden capital flight.
Indonesia has failed to benefit from companies relocating from China amid its rising trade tensions with the US. Of the 33 Chinese companies that have announced plans to relocate or expand their operations abroad, 23 have landed in Vietnam while the remaining 10 chose Cambodia, India, Thailand or Malaysia, among other countries, according to the World Bank.
One of the factors deemed to have hurt Indonesia’s image as an attractive investment destination are its copious regulations that complicate business activities. Between 2015 and 2018, ministries issued more than 6,300 regulations, accounting for 86 percent of the central government’s rules, the World Bank said.
The World Bank then advised President Widodo not to reduce the CAD but hoist FDI if it wants to continue to maintain economic growth. Citing World Development Indicators data, last year, the share of Indonesia’s FDI was only 1.9 percent of GDP. That portion is relatively lower compared to neighboring countries where Cambodia is 11.8 percent of GDP, Vietnam is 5.9 percent of GDP, and Malaysia is 5.5 percent of GDP.
If Indonesia is focused on reducing CAD, according to the World Bank, the country needs a combination of higher levels of community savings and lower investment. Meanwhile, a higher saving rate will reduce consumption and lower investment will drag economic growth.
For this reason, Indonesia needs to finance CAD from stable FDI investments that are export-oriented and not easily taken out by investors in a short time. Thus, Indonesia can increase employment while maintaining economic resilience.
Written by Lexy Nantu, Email: email@example.com