International financial markets remainturbulent, dominated by the political and economicchallenges of the Euro zone debt crisis and signs ofweakening global growth. However, to date, althoughportfolio outflows have been seen, Indonesia's domesticeconomy continues to perform strongly. The economy remainsrelatively well-positioned to weather future external shocksand steps have been taken to improve crisis preparedness,for example, by increasing the flexibility of any fiscalresponse. The Euro zone continues to grapple with the policyresponses to stem the crisis. The political and policyresponses to the Euro zone debt crisis have been evolving onan almost daily basis, influencing global financial markets,risk appetite and capital flows to emerging economies suchas Indonesia. Increased funding stress for Europeanfinancial institutions was followed by a coordinatedannouncement of liquidity swap arrangements by central banksincluding the Federal Reserve and European Central Bank. Inaddition to putting in place policies to address thenear-term impacts of any future shocks, with a protractedweakness in external demand likely, it is an opportune timeto move forward with investments and reforms which canenhance domestic productivity and growth and attract morestable and longer-term capital flows. Indeed, the 2012budget again significantly boosts capital expenditure,although ongoing budget execution challenges could hinderthe effectiveness of the increased allocation oninfrastructure improved infrastructure and investmentclimate can help to promote further the positive recentperformance of Indonesia's manufacturing sector, afterits weakness in the decade following the Asian crisis. Thescope for productivity growth within manufacturing and othersectors through technology adoption and adaption can also beenhanced by further improvements in the quality of educationof the labor force and the institutional environment forresearch and development.
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