World Bank Alerts Indonesia on Tighter External Financing in 2015
Despite slowing economic growth in China (the world’s second-largest economy), the World Bank forecasts higher economic growth for emerging markets in 2015 driven by a decline in global oil prices, a stronger US economy, and continued low global interest rates. The World Bank expects to see a 4.8 percent year-on-year (y/y) GDP growth rate in emerging markets this year, up from an estimated 4.4 percent (y/y) in 2014. Meanwhile, the global economy is expected to grow 3 percent (y/y) in 2015.
In its latest Global Economic Prospects report, the World Bank mentioned that the economic growth momentum in developing countries is key to push global economic growth to 3 percent (y/y) in 2015, up from an estimated growth rate of 2.6 percent (y/y) in 2014. Despite sluggish growth in Japan, the Eurozone, Russia, Latin America, and decelerating (yet still robust) growth in China the world economy will be supported by the performance of emerging markets such as India, Brazil, Indonesia, South Africa and Turkey where inflation and current account deficits are expected to decline due to the spectacular fall of global crude oil prices. These markets, important oil importers, can use this window of opportunity (low oil prices) to implement structural fiscal reforms, which should improve the countries’ long-term growth and inclusive development.
However, the World Bank also warned that monetary policy tightening can jeopardize Indonesia’s fragile recovery amid the government’s push for structural reform in Southeast Asia’s largest economy. Global financial tightening can also occur due to sharply declining oil prices resulting in gradually eroding fiscal and foreign exchange reserves of oil producing countries. This can cause great currency volatility and may expose weaknesses in emerging markets that show currency mismatches between their export earnings and debts. Export earnings in Indonesia have plummeted due to low commodity prices, while debt - particularly private sector debt - has risen sharply after the financial crisis.
The World Bank only expects a slight improvement in Indonesia’s economic growth in 2015. On the back of a gradual increase in investment and domestic spending, the World Bank expects the Indonesian economy to grow by 5.2 percent (y/y) in 2015, up from an estimated 5.1 percent (y/y) last year. The Washington-based lender is positive about President Joko Widodo’s ambitious plans to push for greater infrastructure spending and curb generous fuel subsidies. However, tighter external financing may result in higher domestic interest rates, thus increasing pressure on local banks, businesses, and households in servicing their debt, blocking ability to invest or spend. The World Bank said that countries with historically high private sector debt are particularly at risk. According to the latest central bank data, Indonesia’s total outstanding external debt stood at USD $294.5 billion in October 2014, of which USD $161.3 billion (54.8 percent of total foreign debt) is privately-held debt. Indonesia’s short-term external debt is estimated at ten percent of GDP and 77 percent of the country’s foreign exchange reserves in 2014, thus indicating that it relies heavily on volatile portfolio inflows. Indonesia’s short-term loans (due under a one- year period), stood at USD $48.8 billion, up 12 percent (y/y).
World Bank Global Economic Prospects, January 2015:
| Country/Region |
2014E | 2015F | 2016F |
| World | 2.6% | 3.0% | 3.3% |
| Emerging | 4.4% | 4.8% | 5.3% |
| USA | 2.4% | 3.2% | 3.0% |
| Eurozone | 0.8% | 1.1% | 1.6% |
| China | 7.4% | 7.1% | 7.0% |
| Japan | 0.2% | 1.2% | 1.6% |
| Indonesia | 5.1% | 5.2% | 5.5% |
| India | 5.6% | 6.4% | 7.0% |
Source: World Bank