Investment and Private Consumption to Boost Indonesia's Growth

JAKARTA, INDONESIA – Underpinned by robust private consumption and improving investment performance, Indonesia’s economy is well positioned to maintain resilience and even achieve higher growth rates this year and in 2014, according to a major Asian Development Bank (ADB) report released today.

ADB’s flagship annual economic publication, Asian Development Outlook (ADO 2013), which forecasts economic trends in the region, says Indonesia’s economy will pick up to 6.4% in 2013, and accelerate to 6.6% in 2014. The forecast assumes that private consumption will quicken in 2013, fueled by rising employment, increase in average minimum wages, and rise in public service wages. Election-related spending during the upcoming parliamentary and presidential elections in 2014 is also predicted to contribute to consumption from the second half of 2013.

Investment, both private and public, looks likely to maintain healthy expansion. Support for this projection comes from the upgrades in sovereign credit ratings, lower interest rates, increased budget allocations for infrastructure, and a lengthening record of good GDP growth.

“On the back of robust consumption, rising investment and increased intraregional trade, Southeast Asia’s growth momentum continues. Indonesia is on a more sustained path of long-term growth. However, this is not a time for complacency. Continued efforts are needed to improve the investment climate, and reduce regulatory uncertainly and red tape,” said Jon D. Lindborg, ADB’s Country Director for Indonesia.

ADO 2013 notes that the country recorded growth of 6.2% in 2012, based on sustained private consumption and stronger investment. Private consumption picked up by 5.3%, the strongest in four years, and it contributed almost half of the total GDP growth on the expenditure growth. It is boosted by increases in employment and wages, as well as lower inflation.

Fixed investment accelerated to 9.8% in 2012, driven by an improved investment climate, a record of solid economic growth over recent years, and the expansion of credit. As a result, the ratio of fixed capital formation to GDP rose to 33.2%, the highest in at least 20 years. In the public investment sector, the government’s renewed effort can be seen from the rise in capital spending.

The country’s exports are projected to recover moderately in 2013, supported by stronger growth in the People’s Republic of China (PRC) and some other markets. Exports are expected to accelerate further in 2014, as the prospect for growth in other major industrial economies brightens.

The poverty incidence declined by 0.7 percentage point to 11.7% in the 12 months to September 2012, supported by higher wages for agricultural and construction workers, as well as better incomes for farmers. Last year about 2.7 million jobs in the formal sector were generated while jobs in informal sector fell by 1.5 million, indicating continued improvement in the quality of employment.

Meanwhile, inflation is predicted to remain moderate at the level of 5.2% in 2013 and 4.7% in 2014. This forecast is based on the assumption that the government does not raise fuel price in those two years. Inflation would be higher if fuel prices were increased to ease the high cost to the budget of fuel subsidies.

However, some significant challenges for the country’s development remain, including how to ensure that the economic gains benefit all. The report notes that while the 6-year strong economic growth has helped lift 6.4 million people out of poverty, there are still 29 million Indonesians living below the government’s poverty line. In the event of even a slight reduction in their incomes, another 30 million would become poor.

To overcome this challenge, policies must focus on reducing inequality, including sustained efforts to improve public infrastructure, particularly infrastructure that support connectivity and inclusive growth. Weak infrastructure in rural areas and the eastern provinces have hindered economic activity and the growth of employment.

According to ADO 2013, the Indonesian government has a good start in removing obstacles in infrastructure developments. These include the recent completion of regulations for the Land Acquisition law, a significant increase in the central budget allocation for infrastructure development in the eastern provinces, and expansion of some major ports.