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The economy of Indonesia was buffeted as inflation accelerated, the current account deficit widened, and the rupiah depreciated. Growth in gross domestic product slowed to 5.9% in January-June. Growth in investment moderated, but private consumption remained buoyant. Even as economic growth slowed, the economy generated 1.2 million new jobs, outnumbering new entrants into the labor force.
|Selected Economic Indicators (%) - Indonesia||2013||2014|
|ADO 2013||Update||ADO 2013||Update|
|Current Account Balance (share of GDP)||-2.3||-3.4||-1.8||-2.7|
Source: Asian Development Outlook (ADO) 2013 Update; ADB estimates.
Inflation surged to 8.8% year on year in August after the government sharply raised administered fuel prices in June to reduce the cost of subsidies. The prices of some food items also rose, owing to restrictions on imports. Weak export markets and declining prices for export commodities cut the value of exports by 5.2% in the first half. Imports fell only slightly. Consequently, the current account deficit widened to $15.7 billion, or 3.5% of GDP.
Domestic financial markets were rattled by the global pullback in portfolio investment from emerging markets, coupled with the spike in domestic inflation and deterioration in external accounts. Stock and bond markets weakened, and the rupiah depreciated by 11% against the US dollar through late September.
Bank Indonesia raised its policy interest rate three times from June to September, and the government unveiled a package of measures in August aimed at curbing inflation and containing the current account deficit. Fiscal and monetary policies being implemented to support stability will dampen economic growth in the short term.
Forecasts of GDP growth are revised down from Asian Development Outlook (ADO) 2013 for 2013 and 2014, with slightly higher growth expected next year on expectations that inflation will ease and global trade strengthen. Inflation will be higher than previously expected through the forecast period, owing mainly to the hike in fuel prices. The forecast for the current account deficit in 2013 is widened to 3.4%, with the gap expected to narrow again in 2014 on stronger world trade, the rupiah’s depreciation, and measures being taken to dampen imports and support exports.
Source: ADB. 2013. Asian Development Outlook 2013 Update. Manila.