FALLING commodity prices and a depreciating rupiah have forced the government to lower its economic growth target this year, a senior government official said last Monday.
Luky Alfirman, head of macroeconomic policy at the Finance Ministry's office of fiscal policy, said Indonesia had enjoyed "the temporarily windfall" from high commodity prices and an excess of liquidity, thanks to the United States Fed's quantitative easing policy.
"But this is not normal and now things are back to normal," Luky said during a discussion held to coincide with the release of the World Bank economic outlook.
Commodity prices have fallen, driven by slower growth in resource-hungry countries such as China and India, while economic recovery in the US had prompted the Fed to consider phasing out its bond-buying programme.
"We have revised down our growth target to 5.9 per cent this year (from 6.3 per cent) and six per cent for next year, down from the initial 6.4 per cent," Luky said.
The World Bank has also cut the country's economic growth forecast, to 5.6 per cent this year, from its previous forecast of 5.9 per cent.
"Hopefully, this month we can issue some additional policies to strengthen our economy," Luky said.
The government is seeking to reduce the widening current account deficit by reducing the import of expensive goods and commodities and stimulating export-oriented industries.
Luky said a package of measures announced in August were another example of how the government was becoming more coordinated in its economic policy.
Jim Brumby, an economist at the World Bank, said the proposed changes would be a move in the right direction.
"We think the August package's focus on stability and structural reform are the right thing to do," he said.
Ndiame Diop, the World Bank's lead economist, said that welcoming foreign investment into the country would help Indonesia's economy, calling on the government to give "a very strong emphasis on foreign direct investment (FDI)".
"FDI has the advantage of not only stimulating long-term economic growth, but also financing the current account deficit," Diop said.
"Successful economies are welcoming FDI. Policies must be devised to maximise the benefit of FDI, harvesting and harnessing all the things that potentially come with it, such as technological transfer and knowledge transfer."
The downside, Diop noted, is that in Indonesia investments in all sectors are strongly correlated with the profitability of the commodity sector.
John Riady, a director at the Lippo Group, said last week that there was still opportunity for Indonesia to attract foreign investment.
He noted the recent US$33 billion (RM104.94 billion) in investment deals signed during the visit by Chinese President Xi Jinping to Indonesia was "investment in China moving to Indonesia".
"As China is restructuring its economy and becoming more expensive, it is being forced to move many of the industries that are no longer competitive," John said.