World Bank Releases its March 2017 Indonesia Economic Quarterly
According to the World Bank the economy of Indonesia will continue to accelerate in 2017 supported by strengthening global economic growth, overall rising commodity prices (meaning investment and export performance should improve), the nation's low current account deficit, low inflation, and strong fundamentals of the Indonesian economy. These circumstances should boost Indonesia's gross domestic product (GDP) growth to 5.2 percent year-on-year (y/y) in 2017 (from 5.0 percent in the preceding year).
However, the World Bank also mentioned several matters that pose downside risks for Indonesia's economic growth in its March 2017 edition of the Indonesia Economic Quarterly, titled "Staying the Course". These matters include the possibility of major shifts in trade policies among the advanced economies, unexpected changes in US monetary policy, political uncertainty in Europe, a protracted period of elevated domestic inflation, and weak fiscal revenues.
Meanwhile, there are also domestic risks. Although Indonesia's tax amnesty program was a success in terms of tax declarations (and thus government revenue collection increased), non-tax amnesty revenue collection in Indonesia actually weakened in 2016. This is a concern because rising government revenue is required to invest more heavily in the economy of Indonesia (particularly government investment in infrastructure development is required). On the other hand, fiscal policy credibility was enhanced by cuts in government expenditure, along with the more achievable revenue (and tax) targets in the 2017 State Budget, which bolstered investor confidence.
Rodrigo A.Chaves, World Bank Country Director for Indonesia, said "Having achieved robust growth in 2016, the economic outlook for Indonesia remains on the positive side this year. With an increase in commodity prices, 2017 offers an opportunity for Indonesia to solidify its recovery and secure stronger growth in the longer-term. The country will continue benefiting from sustaining structural reforms in order to do so".
Meanwhile, Indonesia's external sector strengthened with the current account deficit narrowing to a five-year low of 0.8 percent of GDP in Q4-2016, improving from the 1.9 percent deficit in the preceding quarter, largely due to an improvement in manufacturing exports. For 2016 as a whole, the current account balance as a share of GDP narrowed to 1.8 percent from 2.0 percent in 2015, also a five-year low. This deficit is expected to remain at around 1.8 percent of GDP in 2017, unchanged from 2016, on stronger commodity prices. Meanwhile, the government budget deficit is projected to edge up to 2.6 percent of GDP this year, partly due to stronger public expenditures on investment.
The World Bank further projects Indonesian inflation to be temporarily higher in 2017 at 4.3 percent (y/y) due to hikes in electricity tariffs linked to better targeted public subsidies, and due to vehicle registration fees. Higher inflation poses a key downside risk to consumption growth in Southeast Asia's largest economy. Apart from volatility of the exchange rate, consumers are sensitive to price increases, especially those of food and administered prices, while household consumption constitutes the dominant portion of the Indonesian economy (accounting for around 55-60 percent of Indonesia's total economic growth). Should inflation remain higher and longer than expected, consumer spending may be dampened, resulting in lower output growth. In addition, the central bank (Bank Indonesia) may be compelled to act by tightening monetary policy, which would also cool investment growth.