The revision on the forecast given by World Bank was made due to a weak performance of Indonesia’s export amidst the sluggish global economy, and a weak demand from China who is Indonesia’s largest trading partner. Indonesia’s domestic consumption is also currently curtailed by high interest rates.
Low global commodity prices have plagued Indonesia with drastically declining value of exports in recent years. Further, experts from the World Bank say that this commodity price pressure is likely to continue this year, adding to the troubles of the commodity producer and exporter country.
The institution expects that the country’s exports to China, particularly coal, will decline, as China has also been experiencing a slow economic growth causing serious spill-over effects on the rest of the East and Southeast Asian region.
According to Statistics Indonesia, Indonesia’s exports totalled US$12.3 billion in February this year, down 16.0 percent year-on-year, the largest drop in nearly three years. The poor export performance was a result of low global petroleum and commodity prices.
Additionally, the current severe rupiah depreciation against the US dollar has failed to support the country’s export. In theory, the depreciation should have boosted exports, but due to weak global demand for commodities, rising wages in Indonesia and other crippling factors like infrastructure and bureaucracy, these hindered the country’s manufacturing exports.
World Bank also attributes the country’s slow economic growth to the higher interest rate environment that was introduced by Indonesia’s central bank, Bank Indonesia. This was to combat inflation, control the country’s wide current account deficit, support the Indonesian rupiah, and restrict capital outflows amid monetary tightening in the US. The key interest rate of Bank Indonesia stands at 7.50 percent today.
To restore investor confidence in the financial fundamentals of the country, experts at the institution suggest that the country needs to tackle structural impediments to create rapid and structural growth so as to increase jobs and reduce poverty.
