Skies are Clearing for Indonesia, as Global Crisis Winds Down

Domestic consumption propelled Indonesia into recovery by mid-2009, says latest World Bank analysis. Economic growth is forecast to be 4.3 percent this year.

World Bank

Available in: Bahasa (Indonesian)

Jakarta, September 14, 2009 – While most of the world is only now beginning to recover from the global financial crisis, Indonesia’s recovery began at the start of the year.. Domestic consumption in Indonesia remained robust, thanks to election campaign-related spending and an improving trade performance. According to the latest Indonesia Economic Quarterly, released today, government spending should support the economy through the rest of the year.

“Because of Indonesia’s strong reform record and its robust economy leading into the crisis, its large and dynamic domestic market, and very effective and timely actions by the Government and BI,Indonesia has been the least affected by the global financial crisis among all major economies,” said Joachim von Amsberg, World Bank Country Director for Indonesia. “These factors have allowed Indonesia to weather the storm and could support a quicker recovery than in other countries.”

Indonesia Economic Quarterly: Clearing Skies reports that Indonesia’s recovery coincided with an improved external environment. Most of Indonesia’s major export destinations had exited recession by mid-year, while international prices of Indonesia’s exports had also recovered from their late 2008 falls. The quarterly report also finds that:

• The banking sector proved far more robust than many commentators expected, although bankers are making fewer new loans.
• Financial markets continued strengthening through mid-2009, allowing the government to continue financing its budget through the bond market.
• Indonesia’s external position remains robust. External debt was largely rolled over through the first half of 2009, and portfolio investors returned to Indonesian markets, leaving the balance of payments in a small surplus and reserves higher.
• Inflation reached its low point in August, after being more subdued than expected earlier in the year. But inflation remains higher in Indonesia’s than across its trading partners.
• Employment grew by more than the working age population, although most new jobs were informal, especially for women.
• Public finances were more stimulatory than in recent years. Through to July, the government budget overall was in deficit, whereas normally it is in surplus in the first semester.
• The realized budget deficit is likely to be smaller than originally budgeted, near 2.2 percent of GDP. The government’s proposed 2010 budget projects a deficit of 1.6 percent of GDP.

“We expect the mid-2009 trend of gradual recovery to continue over the coming year and a half. Domestic demand is likely to continue as the main driver of growth, as the government continues to disburse its fiscal stimulus and, in 2010, investors regain confidence,” said World Bank Senior Economist, Shubham Chaudhuri, who was one of the key authors of the new quarterly.

The World Bank expects Indonesia’s economy to expand by 4.3 percent in 2009, slowly accelerating to 5.4 percent in 2010, a stronger outlook since than the last Quarterly. Inflation is expected to slowly rise over the coming months to average 4.7 per cent 1this year and 5.6 percent next. These developments, and the end of the government’s BLT (unconditional cash transfer) program are likely to slow the recent gains in poverty reduction. And while the skies appear to be clearing for Indonesia, significant clouds remain on the horizon, especially from the global economy.

World Bank Office Jakarta
Indonesia Stock Exchange Building
Tower 2, 12th Floor (62-21-5299-3000)

Contact:

In Washington DC: Mohamad Al-Arief
(1-202) 458-5964, malarief@worldbank.org

In Jakarta:Randy Salim: (62-21) 5299-3259
rsalim1@worldbank.org

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Report : Indonesia Economic Update (Sept 2009: Clearing Skies)