The World Bank highlights that with the rise of a global recession, Indonesia should wise up and respond in turn with its foreign direct investment. 

Indonesia’s economy, which has been growing steadily at around 5.3 percent per year on average since the start of the millennium, could be dragged down as it faces downside risks associated with the increasingly clouded outlook for the global environment, the World Bank has said. The assessment was one of many points discussed during a closed-door meeting between President Joko “Jokowi” Widodo and World Bank country director for Indonesia and Timor-Leste Rodrigo A. Chaves, among other officials, at Merdeka Palace last week. According to the World Bank’s meeting material, a copy of which was obtained by The Jakarta Post, Indonesia’s gross domestic product (GDP) growth could slow to 4.9 percent next year and slide further to 4.6 percent in 2022 amid intensifying risks such as the escalating trade war between the United States and China. “Growth …

Indonesia’s economy, which has been growing steadily at around 5.3 percent per year on average since the start of the millennium, could be dragged down as it faces downside risks associated with the increasingly clouded outlook for the global environment, the World Bank has said.

The assessment was one of many points discussed during a closed-door meeting between President Joko “Jokowi” Widodo and World Bank country director for Indonesia and Timor-Leste Rodrigo A. Chaves, among other officials, at Merdeka Palace last week.

According to the World Bank’s meeting material, a copy of which was obtained by The Jakarta Post, Indonesia’s gross domestic product (GDP) growth could slow to 4.9 percent next year and slide further to 4.6 percent in 2022 amid intensifying risks such as the escalating trade war between the United States and China.

“Growth in Indonesia has been slowing and will weaken further with the global slowdown – a global recession would be damaging,” one of its slides read.

The Washington, DC-based institution also estimated that if the growth rates of China and the US fell by 1 percent, it would trim 0.3 percent off the growth of the Indonesian economy.

Indonesia’s economy, the largest in Southeast Asia, expanded by 5.05 percent in the second quarter, softening from 5.27 percent recorded over the same period last year, according to Statistics Indonesia (BPS) data. The government expects the economy to grow 5.3 percent this year as stated in the 2019 state budget.

The World Bank’s bleak outlook, it explained, was driven by weak productivity and slowing workforce growth, while lower commodity prices due to the global economic slowdown would also further hurt the economy, according to the meeting’s materials.

With downside risks increasing, Indonesia could be susceptible to another episode of capital outflows, which would weaken the rupiah and drive up Indonesia’s debt paper yields. The World Bank estimated that the potential upcoming outflows could be larger compared to the outflows that occurred during the 2013 taper tantrum and 2015 yuan devaluation.

“Indonesia will suffer because portfolio capital finances the current account deficit [CAD],” it said.

However, it continued by saying that instead of focusing on improving the CAD – an indicator widely blamed for the rupiah’s depreciation last year – the government should redirect its efforts to improve the investment climate to attract more foreign direct investment (FDI).

“The main recommendation to the Indonesian government is that in the current environment, the best way to protect Indonesia is by financing the CAD through FDI as opposed to portfolio inflows,” Chaves said after the meeting with Jokowi.

Responding to the World Bank’s assessment, Finance Minister Sri Mulyani Indrawati said the government must remain vigilant in its monitoring of the risks for the domestic economy, and vowed to continue fostering an investor friendly environment.

“At the end of the day, [foreign] capital will look for a safe place. So, if Indonesia can show that we are a good place with stable growth and prudent management, capital will pour into the country,” said the former World Bank managing director in Jakarta on Friday.

The Office of the Coordinating Economic Ministry’s deputy head for macroeconomics and finance, Iskandar Simorangkir, said the World Bank was quite conservative in its assessment of Indonesia’s CAD outlook.

“In the second quarter of 2014, our CAD reached 4.26 percent of GDP but we were fine. The World Bank is conservative even though our economic fundamentals were solid,” said Iskandar, referring to the time when Indonesia’s CAD passed the 3 percent threshold deemed safe by the central bank.

Bank Indonesia (BI) senior deputy governor Destry Damayanti said separately that while Indonesia had welcomed around Rp 170 trillion (US$12.02 billion) in portfolio inflows so far this year, it would be better for the country if FDI also rose to safeguard the domestic economy from a sudden capital flight.

Indonesia has failed to benefit from companies relocating from China amid its rising trade tensions with the US. Of the 33 Chinese companies that have announced plans to relocate or expand their operations abroad, 23 have landed in Vietnam while the remaining 10 chose Cambodia, India, Thailand or Malaysia, among other countries, according to the World Bank.

One of the factors deemed to have hurt Indonesia’s image as an attractive investment destination are its copious regulations that complicate business activities. Between 2015 and 2018, ministries issued more than 6,300 regulations, accounting for 86 percent of the central government’s rules, the World Bank said.

“The government can fix the regulations to boost FDI, which will drive economic growth,” said Bank Negara Indonesia (BNI) economist Ryan Kiryanto, adding that an influx of foreign money would help strengthen the country’s economic resilience.

It also needed to align regulations made by the government and regional administrations, reduce restrictions on foreign investors and amend the list of negative investments for foreign investors, he added.

Maybank Indonesia economist Myrdal Gunarto voiced a similar view, suggesting the government look for other means to boost the economy in the real sector, such as improving ease of investment and boosting exports of value-added products, instead of continuously trying to fix the CAD.

“It will all depend on the government’s consistency in maintaining its efforts in the future,” he said. (asp)