0 Slowing Domestic Investment Prompts World Bank to Cut Indonesia's Growth Forecast

The World Bank has cut its growth forecast for Indonesia this year as the pace of domestic investment recedes and pressures on the country’s external balance intensify due to massive fuel imports. The Washington-based lender forecast Indonesia’s economy would expand by 6.2 percent this year, a notch below the previous forecast of 6.3 percent. Next year’s growth projection remains unchanged at 6.5 percent, the World Bank said in its quarterly report on Monday. 

Indonesia’s economy grew by 6.2 percent last year, down from the 6.5 percent expansion recorded in 2011. Indonesia’s economy has grown by more than 6 percent annually for the past three years. “The biggest risk to near-term growth may come from domestic investment,” the World Bank said in the statement. The country’s fixed investment growth declined to 7.3 percent year-on-year in the fourth quarter of 2012, down from 12.5 percent in the second, the World Bank said. Imports of capital goods also weakened by 12.1 percent year-on-year in January 2013, suggesting a moderation of investment. 

“The weaker commodity market conditions, which have been in place since mid-2011, may continue to impact aggregate investment spending with a lag, particularly in capital-intensive resource sectors where investment is lumpy,” the World Bank said. Higher inflation could erode people’s purchasing power and force the nation’s central bank to tighten monetary policy, both of which could put a brake on investment in Indonesia’s domestic consumer sector, the global lender said. 

Inflation accelerated in February to 5.3 percent year-on-year compared to 4.6 percent pace in January. The last time inflation exceeding 5 percent was in June 2011. Bank Indonesia, however, has maintained its benchmark interest rate at a record-low 5.75 percent for 14 straight months. The World Bank also noted that investment “is likely to face some headwinds from ongoing, and possibly further, regulatory uncertainties and political noise as the 2014 elections approach.” 

Such policy uncertainty was most apparent in the country’s mining sector, where the policy environment was ranked as the least attractive among 96 countries, the World Bank said, quoting a recent Fraser Institute survey of global mining executives. The lender estimated that should investment only grow by 5 percent in 2013, about half its pace in 2012, the country’s gross domestic product growth would be reduced by about 1 percentage point. The government has said it expects the economy to grow by 6.5 percent this year, while the central bank has predicted growth of between 6.3 percent and 6.8 percent. 

Chatib Basri, the head of the Investment Coordinating Board (BKPM), and Bambang Brodjonegoro, chief of the fiscal policy office at the Finance Ministry, did not respond to a request for comment on the World Bank report. The World Bank projects the current account deficit to fall to 2.5 percent of GDP in 2013, from 2.7 percent in 2012. The improving global economy is forecast to boost demand for the country’s exports, offsetting energy imports. 

“The oil and gas trade deficit will likely continue to pose a challenge in 2013 amidst strong domestic energy demand, especially if there is not further progress on fuel subsidy reform,” the World Bank said, adding that the fuel subsidy carried an opportunity cost, missed its intended target and distorted energy usage. The government has estimated that subsidized fuel consumption may escalate to between 48 million and 53 million kiloliters this year, more than the 46 million kiloliters set in the state budget. The government spent Rp 211.9 trillion ($21.8 billion) last year to provide cheap fuel below market price. 

This year, the bill could reach beyond Rp 300 trillion, compared to the Rp 216 trillion spending allocated for infrastructure, which according to the World Bank is “inadequate and aging” and “continues to constrain growth, causing bottlenecks and high logistics costs.” The government’s attempt to raise the fuel price failed last year after violent street protests and strong opposition from lawmakers. Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), expressed support for the World Bank assessment on the fuel issue. 

Suryo said the subsidy money could boost the country’s growth if it were allocated to build infrastructure as well as invest in education, health care and small and medium enterprise development programs. “If the government communicates this well enough there will be no protest if they increase the fuel [price], because there will be a lot of jobs available,” Suryo said. Several economists in Jakarta have long urged the government to raise the subsidized fuel price and shift the funds to finance more productive projects, including boosting the development of infrastructure such as airports, seaports and toll roads. Poor infrastructure has long been blamed for slow growth in Indonesia.

source : the jakarta globe