Macroeconomic Stability Indonesia: Inflation and GDP Update

Martowardojo informed that the pace of inflation had already reached about 1.35 percent in the first three weeks of November. Initially, Bank Indonesia held an inflation target of between 3.5 to 5.5 percent for full year 2014. However, after the government raised subsidized fuel prices by more than 30 percent inflation will certainly fail to be held within the central bank’s target range. Traditionally, higher fuel prices result in significant inflationary pressures for a period of three months. Therefore, Bank Indonesia expects that inflation will touch 8 percent y/y at the year-end. In an effort to combat high inflation, the bank has already raised its benchmark interest rate (BI rate) from 7.50 percent to 7.75 percent (and may raise its key rate again ahead of higher US interest rates in an attempt to limit capital outflows).

Regarding inflation in December, Martowardojo said that the figure may exceed 2 percent (month-to-month). In December, Indonesia’s inflation rate is usually higher than the average monthly inflation due to the impact of Christmas and New Year celebrations.

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
January          1.03%          1.07%
February          0.75%          0.26%
March          0.63%          0.08%
April         -0.10%         -0.02%
May         -0.03%          0.16%
June          1.03%          0.43%
July          3.29%          0.93%
August          1.12%          0.47%
September         -0.35%          0.27%
October          0.09%          0.47%
November          0.12%  
December          0.55%  
Total          8.38%          4.19%

Source: Statistics Indonesia (BPS)

On Monday 1 December 2014 Statistics Indonesia (Badan Pusat Statistik) will release the November inflation figure. Looming higher inflation is also a concern to investors. Declining Indonesian stocks in the past two days are partly explained by concerns about accelerated inflation in Indonesia.

Meanwhile, last week, Martowardojo said that growing US dollar-denominated corporate debt and foreign-owned government bonds are the largest challenges currently faced by Indonesia. Amid looming higher US interest rates (most likely in the first half of 2015), investors will review investment risks and financial asset valuation. This can lead to capital outflows from emerging economies, including Indonesia, and jeopardize economic stability. As Indonesia is still plagued by a wide current account deficit and relatively low foreign exchange reserves investors may feel that the country is 'too risky'. Another weakness is that Indonesia’s financial markets are saturated with foreign-owned capital and thus highly vulnerable to external shocks.

Meanwhile, Sofyan Djalil, Indonesia’s Coordinating Minister for Economic Affairs, expects that gross domestic product (GDP) growth can bounce back to +7 percent y/y by the end of President Joko Widodo’s (first) term in 2019 provided that the government can indeed reallocate the funds (saved by the fuel price hike) to productive sectors such as infrastructure development. Indonesia is currently characterized by a lack of quantity and quality of infrastructure thus resulting in high logistics costs and weak competitiveness (compared to businesses in regional peers). Djalil said that enhanced electricity connectivity in Indonesia is one of the most important matters that need to be dealt with. Some of the funds saved by the fuel price hike will be allocated to build an additional 35,000 MW worth of power plants between the years 2015 and 2019. Total investments required for this program are estimated at IDR 980 trillion (USD $81 billion), nearly half of which should originate from the private sector through public-private partnerships.

Investments (public and private) should form the key driver for Indonesia’s economic growth in 2015 amid a sluggish international market (US normalizing and a slowdown in regional trading partners). Finance Minister Bambang Brodjonegoro said that, although domestic consumption remains the main pillar of economic growth in Indonesia (accounting for about 55 percent of total economic growth), investments are required to push the economy to higher growth.

Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):

 Year    Quarter I
   Quarter II    Quarter III    Quarter IV
 2014        5.22        5.12         5.01  
 2013        6.03        5.89         5.62         5.78
 2012        6.29        6.36         6.16         6.11
 2011        6.45        6.52         6.49         6.50
 2010        5.99        6.29         5.81         6.81
 2009        4.60         4.37         4.31         4.58

Source: Statistics Indonesia (BPS)

Gross Domestic Product of Indonesia 2006-2013:

    2006   2007   2008   2009   2010   2011   2012   2013
(in billion USD)
 285.9  364.6  432.1  510.2  539.4  706.6  846.8  878.0
(annual percent change)
   5.5    6.3    6.1    4.6    6.1    6.5    6.2    5.8
GDP per Capita
(in USD)
 1,643  1,923  2,244  2,345  2,984  3,467  3,546  3,468

Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)