Kedutaan Besar Republik Indonesia
Ottawa
Embassy of the Republic of Indonesia
Ambassade de la RÉpublique d'Indonésie

Indonesia Economy: Good first quarter in 2011 but risks lie ahead

Indonesia’s economic development during the first quarter of 2011 seems to be a déjà vu of 2008. Strong economic momentum coupled with a rise in commodity prices resembling conditions three years ago is why the World Bank’s first Indonesia Economic Quarterly for 2011 is titled “2008 Again?”.

The report launched at the Paramadina Graduate School on March 16 has two main messages. First, Indonesia’s economy is growing strong, exceeding expectations made in the fourth quarter of 2010 and well above the average for the last ten years. World Bank growth forecast for 2011 has been upgraded to 6.4 percent, with a possibility of further increase to 6.7 percent in 2012. Balance of payments inflows are strong, foreign direct investment has increased, reaching record levels.

The second main message from the report, despite this bright outlook, Indonesia should take note of risks that lie ahead. Many global commodity prices are back at or above their 2008 peaks. Shubam Chauduri, Lead Economist of World Bank Indonesia, explained that a rise in commodity price may bring a positive impact to the country’s GDP as a whole because Indonesia is a commodity economy. “However, risks lie for poor households who may be greatly affected by the sharp increase of living costs,” he warned. Rising food price inflation also pose a risk to progress on poverty reduction. Shubham added, at the global level the World Bank estimates that recent rises in food prices will lead to 44 million more people entering poverty.

Another risk that Indonesia should be aware of is rising oil prices, which may cause the country to spend more on fuel subsidies. There is a high possibility this will occur, bearing in mind fuel subsidies has exceeded the original budget allocation in six out of the last seven years. More spending on fuel subsidies will reduce budget for infrastructure development which is one of the main factors severely holding back Indonesia’s potential to grow. During the report launch, Chatib Basri, from the National Economic Committee of the President, expressed his concerns that oil price may also trigger capital to flow out of Indonesia, particularly from government bonds. He warned that measures should be taken to avoid this since capital inflow has contributed to the recent positive economic conditions.

The report also highlighted the rise of the middle income class in Indonesia which accounts for 77 percent of the population in 2010. Around 7 million people per year have moved from low income to the middle income class from 2003 to 2010. Shubam explained that Indonesia can benefit from a larger middle income population since the demands of public goods is likely to shift to better quality and more sophisticated services in health and tertiary education. He added that, “Policies will also need to be put in place to meet rising middle class expectations and eventually benefit the population in general.” Mohammad Ikhsan, special advisor to the Vice President, commented that the middle income class will change the landscape of future policy formulation. The growing importance of this group of population was emphasized by Chatib Basri stating that, “In five to ten years, urban issues will be more prominent compared to rural development due to high population of the middle class.”

Source : www.worldbank.org