The Economy of Indonesia More Promising in 2017

Indonesia is expected to end the prolonged economic slowdown, finally, in 2016. Between 2011 and 2015 the nation’s gross domestic product (GDP) continued to slide amid sluggish global growth, tumbling commodity prices and domestic changes (higher interest rate environment in 2013-2015 to combat sharply rising inflation as a result of subsidized fuel price reforms). In 2016 this prolonged slowdown will most likely end. Based on the latest forecasts, the Indonesian economy should expand by around 5.0 percent (y/y) this year, up from a growth pace of 4.7 percent in 2015.

The outlook for 2017 looks more promising. Recently, commodity prices (particularly coal and crude palm oil) have been rising, a development that will surely boost Indonesia’s export performance in the period ahead (being one of the world’s key commodity exporters). Household consumption in Indonesia is strengthening due to people’s improving purchasing power amid low inflation and a stronger rupiah (giving rise to cheaper imports). Meanwhile, the 13 economic policy packages that have been released by the Indonesian government (since September 2015) – which include deregulation and fiscal incentives – should boost direct investment in Southeast Asia’s largest economy next year.

Lastly, the government’s tax amnesty program will enhance the government’s fiscal room. This would make it less likely that the government needs to cut its ambitious spending programs, including infrastructure. This year several (non-priority) infrastructure projects had to be delayed as the budget of Indonesia’s Public Works and Public Housing Ministry was cut by IDR 6.9 trillion (approx. USD $531 million) after previously suffering a IDR 8.4 trillion (approx. USD $646 million) cut in the first round of this year’s budget cuts.

In the first three quarters of 2016 the Public Works and Public Housing Ministry disbursed 55.8 percent of its full 2016 budget (almost 60 percent of this budget was channeled to infrastructure projects). This result is better compared to budget spending realization in the same period one year earlier. One of the key problems related to infrastructure development is land acquisition. This usually is a costly and time-consuming affair.

Both the economic policy packages and the tax amnesty program also boost investors’ confidence in the Indonesian government. This should result in more direct investment as well as credit growth (which has remained subdued so far this year).

It all leads to the conclusion that the Indonesia’s economic growth will continue to accelerate in 2017. Based on the latest World Bank report, the economy will grow 5.1 percent (y/y) in 2016, 5.3 percent (y/y) in 2017 and 5.5 percent (y/y) in 2018.

World Bank Projections – Economic Growth (annual % change):

Country 2016 2017 2018
Indonesia 5.1 5.3 5.5
China 6.7 6.5 6.3
World 2.4 2.8 3.0
Emerging Markets 3.5 4.4 4.7

Source: World Bank

There obviously also remain challenges to Indonesia’s macroeconomic environment. A short-term challenge is the looming Fed Funds Rate hike that may occur in December 2016. Tighter monetary policy in the world’s top economy will cause a high amount of (short-term) capital outflows from emerging markets, including Indonesia. This will put severe pressure on Indonesia’s stock market and rupiah exchange rate.

Secondly, China’s economic growth is estimated to continue to slow down in the years ahead. Being one of Indonesia’s biggest trading partners it surely affects Indonesia (particularly in terms of exports). For each 1 percent drop in China’s GDP growth, 0.11 percentage points disappear from Indonesia’s GDP. And it is not only China that faces difficulties in terms of macroeconomic growth. Advanced economies such as the USA, European Union and Japan all face challenges and therefore undermine global economic growth and demand (rising global economic growth in the years to come is especially carried by emerging market economies).

Indonesia’s Quarterly GDP Growth 2009-2016 (annual % change):

Year Quarter I Quarter II Quarter III Quarter IV Full-Year
2016 4.91 5.18
2015 4.73 4.66 4.74 5.04 4.8
2014 5.14 5.03 4.92 5.01 5.0
2013 6.03 5.81 5.62 5.72 5.6
2012 6.29 6.36 6.17 6.11 6.0
2011 6.45 6.52 6.49 6.50 6.4
2010 5.99 6.29 5.81 6.81 6.2
2009 4.60 4.37 4.31 4.58 4.6

 

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