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World Bank warns Indonesia of potential China slowdown

Publication Date : 16-10-2012

 

The World Bank says Indonesia's economy will remain resilient against threats posed by stalling economic recovery in the US and Europe, but warned policymakers in the country to monitor economic developments in China, the potential economic slowdown of which could have more "negative spill over" effects for the archipelago.

A 1 per cent economic slowdown in China may decelerate Indonesia's economic expansion by up to a half a per cent, the Washington-based institution noted in its October report released yesterday, titled "Indonesia Economic Quarterly: Maintaining Resilience".

The report forecasts that Indonesia's economy will expand to 6.1 per cent this year and 6.3 per cent next year, but warned the country over "downside external risks", especially those stemming from China's economy, which could push down Indonesia's growth to just below 5 per cent in 2013.

"Why China? Because it has very strong impact on Indonesia's economy, both directly and indirectly," said Ndiame Diop, World Bank economic advisor for Indonesia.

Diop argued that the direct impact for Indonesia's economy would be felt through the trade channels, as China currently absorbs about 11 per cent of Indonesia's total exports, mostly commodities.

The indirect impact from China's slowdown, meanwhile, would also be felt through investment.

"If China slows down, it is going to be felt in Japan and Korea. They happen to be important sources of FDI [Foreign Direct Investment] to Indonesia," he explained.

China is Indonesia's biggest trading partner, with total trade between the two countries amounting to US$60.5 billion last year, according to data from the Chinese Embassy in Indonesia.

China, the world's second-largest economy, is currently feeling the pinch of weakening global demand, recording its slowest economic growth in three years of 7.6 per cent in the second quarter of this year.

The World Bank this month chopped its economic growth forecast for China to 7.7 per cent from its earlier prediction of 8.2 per cent as the world's second-largest economy heads for a "soft landing" due to its heavy reliance on exports.

Indonesia must be prepared for policies in anticipation of China's slowdown as there were "no signs of the business cycle turning" in China at the moment, according to Diop.

The World Bank also suggested that Southeast Asia's largest economy improve the quality of both the allocation and the efficiency of spending, especially considering the tough external challenges that the country would face in the future.

The World Bank advised Indonesia to maintain policy consistency and clarity, particularly in the area of business and investment regulation, and recommended policymakers in the country to avoid any "policy missteps", meaning policies that were implemented to address a near-term issue but actually carried longer-term risks and costs.

Among the Indonesian government policies highlighted by the World Bank is excessive spending on fuel subsidies, which it argued limited Indonesia's flexibility to respond to any external risks that could cause downturns in growth.

"Fuel subsidies aren't good, they use up a lot of fiscal resources," World Bank sector manager for poverty reduction Jim Brumby said yesterday. "And they aren't pro-poor, because the benefits go to the people who use cars."

 

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