T

he World Bank (WB) is cautioning Indonesia on increased risks this year from domestic factors.

The agency warned of moderate investment growth, and soaring inflation might undermine the consumer purchasing power needed to propel the consumption-reliant economy.

In its economic quarterly report titled “Pressure Mounting” released on Monday, the World Bank cut its 2013 growth forecast for Indonesia to 6.2 percent from 6.3 percent.

Investment was likely to face some drag from ongoing failure to address regulatory issues, policy missteps and general uncertainty surrounding the outcome of the upcoming 2014 elections, according to the report.

“Indonesia also continues to face stiff competition from other economies in the region for export-oriented investment at a time when labor costs, at least for minimum wage workers, have risen significantly,” the report said.

The World Bank said that investment growth — touted by Finance Minister Agus Martowardojo as the main growth driver this year, replacing consumption — might fall to 8 percent of gross domestic product (GDP), as compared to 9.8 percent in 2012. Halving investment growth to 5 percent in 2013 would reduce real GDP growth by about 1 percent.

Investors, according to the agency, have also been monitoring measures restricting trade and increases in protectionism that have coincided with policymaker concerns on moves to ease current account deficits and rupiah depreciation.

The agency argued that, going forward, it would be important to ensure that policy responses to Indonesia’s external account dynamics avoided counterproductive and unintended consequences, such as raising investor risk perceptions when gross external debt financing needs were significant, reducing competitiveness by increasing domestic prices or hampering exports which rely on imported inputs.

“New firms, whatever their size, are most likely to improve job creation and productivity growth rather than old firms,” World Bank economic advisor and lead economist for Indonesia Ndiame Diop said. “It’s important for you to open new markets to do business. Make it easier for new investors to enter the market. That would bring the highest payoff for economic growth.”

Investment Coordinating Board (BKPM) chairman M. Chatib Basri, however, remained upbeat, arguing that prevailing uncertainties in developed nations benefited Indonesia, as companies looked to emerging markets as investment alternatives.

“A moderation in investments may occur, but I don’t think it will be significant. Overall, 8 percent growth against GDP in our investments can still be considered as relatively good,” he said.

Foreign direct investment (FDI) rose by 3.2 percent in 2012 over 2011, as measured by Bank Indonesia, and by a larger 26 percent as measured by the BKPM.

The report also highlighted recent inflationary trends that might weaken domestic consumption, which drives around 60 percent of the nation’s economic growth.

Inflation soared to a 20-month high of 5.3 percent in March, nearing the central bank’s forecast of 5.5 percent.

The World Bank warned of additional pass-through effects of imported inflation from sustained weakness in the rupiah going forward.

 “Pass-through from the weaker rupiah exchange rate was limited in 2012 but will likely continue to feed through into consumer prices with a lag, and sustained currency weakness would compound this,” the report said.

The World Bank has also raised cautioned on the rupiah exchange rate, given the continuous rise in gross private external debt exposure that has exceeded public external debt for the first time.

Given rising debt, policymakers will need to remain wary of the exposure of some corporate balance sheets to further rupiah weakening, according to the agency. Some 87 percent of the nation’s private external debt is denominated in US dollars.

“In addition, there have been episodes when foreign exchange market liquidity has been tight, and it will be important for policy to help avoid such episodes going forward.”

An upward adjustment of subsidized electricity prices by an average of 15 percent, while welcomed on efficiency and fiscal grounds, will have a temporary inflationary effect, as would any additional administered price increases through 2014.