WB warns Indonesia against potential China slowdown

17 january 2013

JAKARTA — The World Bank has said Indonesia’s economy would remain resilient against threats posed by stalling economic recovery in the United States and Europe, but warned policymakers in the country to monitor economic developments in China, the potential economic slowdown of which could have more “negative spillover” effects for the archipelago, local media reported Tuesday.

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A 1 percent economic slowdown in China may decelerate Indonesia’s economic expansion by up to half a percent, the Washington-based institution noted in its October report entitled “Indonesia Economic Quarterly: Maintaining Resilience” which was released Monday.

The report forecasts that Indonesia’s economy will expand to 6. 1 percent this year and 6.3 percent 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 percent in 2013.

“Why China? Because it has very strong impact on Indonesia’s economy, both directly and indirectly,” Ndiam Diop, a World Bank economic advisor for Indonesia said.

Diop argued that the direct impact for Indonesia’s economy would be felt through the trade channels, as China currently absorbs about 11 percent 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 South Korea. They happen to be important sources of foreign direct investment to Indonesia,” he explained.

China is Indonesia’s biggest trading partner, with total trade between the two countries amounting to 60.5 billion U.S. dollars last year, the Jakarta Post reported.

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.