Extracted from East Asia Update report from World Bank http:\/\/siteresources.worldbank.org\/INTEA...ate-Nov2007.pdf<\/p>\n
Indonesian Investment Climate<\/p>\n
The last six months have witnessed a pick-up in the
\nmomentum of growth. After a moderate slowdown in 2005,
\neconomic growth in Indonesia has increased appreciably.<\/p>\n
By 2Q 2007, year-on-year growth was up to 6.3 percent
\ncompared with 5 percent in early 2006. Most monthly
\nindicators signal a further rise in the third quarter of 2007,
\ndespite recent turbulence in international financial and oil
\nmarkets.<\/p>\n
The main drivers of recent growth have been
\ninvestment and net exports. Investment growth has been
\nrunning around 7-8 percent per annum since 2Q 2006 with
\nindications of a further pick-up in the near-term. For their
\npart, net exports were neutral or a slight drag on growth in
\nthe second half of 2006. In the first half of 2007, they added
\nmore than 1 percent to growth in GDP. In nominal terms,
\nexports have surged to record levels, owing only in part to
\nthe world commodity price boom. Exports of agricultural
\nand mining and mineral commodities (accounting for about
\n1\/3 of merchandise exports) increased by 18 and 42 percent
\nin US$ terms respectively earlier this year. Exports of
\nmanufactured products (which account for almost half of the
\ntotal) also increased at a robust rate of 15 percent; with
\nforestry products up by 24 percent.<\/p>\n
Reflecting the strength in exports, the current
\naccount surplus is projected to widen further to US$10.8
\nbillion in 2007 (some 2 1\/2 percent of GDP) versus virtual
\nbalance in 2005. Some of these recent gains have been
\noffset by the capital account, which is currently projected to
\nrecord a narrower surplus in 2007 than the year before. Net
\ninternational reserves have climbed steadily during this
\nperiod, to almost US$53 billion in late September,
\ncompared with US$42.6 billion at end-2006.<\/p>\n
Financial markets quickly absorbed the recent
\nturbulence in international markets with what appears to be
\nminimal disruption of overall economic performance to
\ndate. As examples, the Jakarta Stock Exchange, after
\nplunging by 20 percent in the 3 weeks between late July and
\nmid-August, rebounded quickly and was back at record
\nhighs by mid-October. The rupiah exchange rate, which
\nwas around 9000\/US$ in the months prior to the turmoil,
\nslid to 9500, before recovering to 9100 by early October.<\/p>\n
Medium- and long-term interest rates rose by some 200
\nbasis points across the yield spectrum during the crisis. As
\nof early September, the yield curve had reversed about half
\nof the rise, and there was a further moderate improvement
\n(especially at the shorter end of the spectrum) through early
\nOctober.<\/p>\n
Inflation has been a growing concern recently. It
\nfell dramatically in the wake of the major 2005 fuel price
\nincreases from a high of 18.4 percent (y-o-y) to 5.3 percent
\nin November 2006. However since then inflation has been
\ncreeping higher, reaching 6.9 percent by October, very near
\nthe upper end of Bank Indonesia\u2019s target band of 5-7
\npercent by end-2007. Foodstuffs, which account for almost
\n25 percent of the CPI in Indonesia, have been the main
\nsource of inflation in the past several months; they have
\noutpaced general inflation since early 2006, often by several
\npercentage points. By contrast, administered prices (fuel,
\ntransportation and electricity among others) have been
\nholding down inflation during the past year, running at less
\nthan 2 percent (measured on a 12-month basis).<\/p>\n
Reflecting concerns about inflation, Bank
\nIndonesia held its key policy rate steady at 8.25 percent
\nsince early July. This shift in stance followed a series of
\ncuts in steps of 25-50 basis points from a peak of 12.75
\npercent in April 2006. Reflecting the stronger economy,
\nincluding investment, credit growth has accelerated in 2007,
\nreaching 22 \u00bd percent (y-o-y) by August.<\/p>\n
Fiscal deficits have narrowed significantly in
\nrecent years, from above 4 percent of GDP in 1998 to 0.5
\npercent in 2005. However, the deficit widened a little to 0.9
\npercent of GDP in 2006, and it looks likely to widen further
\nin 2007, to 1.5 percent of GDP. This wider deficit stems, in
\npart, from temporary factors (e.g., large, once-only
\nsettlements of arrears in payment of VAT refunds and
\nspending for disaster relief). But it also reflects more lasting
\nfactors, e.g., increased spending on priorities, including
\nhealth, education and infrastructure. Notwithstanding these
\nwider deficits, the ratio of government debt to GDP is
\nprojected to continue to decline, from 39 percent at end-
\n2006 to less than 35 percent by end-2007, owing to
\ncontinued strong growth.<\/p>\n
The incidence of poverty dropped in 2007, to 16.6
\npercent from 17.8 percent in 2006. This reverses about 75
\npercent of the deterioration in 2006. Analysis of this latest
\ndata is underway but it appears that strong economic
\ngrowth, falling inflation and targeted cash transfers
\ncontributed to the decline in 2007. Nevertheless, a large
\nproportion of the population remains vulnerable with many
\nhouseholds tightly clustered around the poverty line.<\/p>\n
Viewed in relation to the eight Millennium Development
\nGoals (MDGs), poverty alleviation (as measured by the
\npercentage of the population living on US$1\/day) is one of
\nIndonesia\u2019s successes. Other MDG successes include:
\nenrollment in primary schools; child mortality; and access to
\nimproved water facilities. Other indicators are less positive, but overall the majority of Indonesia\u2019s indicators are ontrack
\nto achieve the MDGs Reform momentum continues, especially in
\nbudgeting and investment climate reforms. The Government
\nis using increased fiscal space to scale up spending on
\npoverty alleviation through a large National Community
\nEmpowerment Program and two conditional cash transfer
\npilots, one directed at households and the other at
\ncommunities. The 2008 budget proposes a substantial
\nreallocation of spending to priority areas, including
\ninfrastructure, education and social assistance. In July 2007
\nthe Government issued an integrated economic policy
\npackage aimed at improving the investment climate and
\nbuilding upon a series of individual policy packages issued
\nin 2006 covering investment policy, infrastructure, financial
\nsector reform and SME policy. The Government has
\nestablished teams to monitor progress on each part of the
\npackage and has designated a minister responsible for each
\nitem. There have been a number of specific reform
\ninitiatives as well, including passage of an investment law
\nand associated regulations on the negative list designed to
\nimprove transparency. There was also a new tax
\nadministration law that addresses business concerns about
\narbitrary treatment and a Government Regulation in lieu of
\nLaw that clarifies the status of Batam (Indonesia\u2019s largest
\nand most active free trade zone).<\/p>\n
Looking ahead, growth is expected to reach 6.3
\npercent for 2007 as a whole and to rise a bit further, to 6.4
\npercent in 2008. Investment is expected to remain strong,
\nbut exports are expected to slow modestly, due to the
\nprojected slowdown in the world economy. A mild fiscal
\nstimulus will help growth prospects with the slight widening
\nof the budget deficit to 1.8 percent of GDP. Spending on
\npro-poor programs and key priority areas such as
\ninfrastructure and social programs (poverty reduction) while
\nincrease (in part through a reallocation from fuel subsidies),
\nwhile achieving reductions in government debt (measured as
\nshare of GDP).<\/p>",
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