10 May 2022 (closed)
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Although the economy of Indonesia will continue to face challenges in 2017, there are a couple of matters that give rise to optimism about accelerating economic growth. These were the conclusions drawn at the Entrepreneur Networking Forum that was held by Bank Tabungan Negara Pensiunan Nasional in Bandung (West Java) on Wednesday (14/09). Although expectations were recently revised down (due to government budget cuts), Indonesian economic growth is still set to rebound in 2016 after having experienced several years of slowdown.
Raden Pardede, Senior Economist, said the year 2017 will continue to bring challenges for Indonesia's economic growth. The global economic recovery goes at a very slow pace and this impacts on Indonesia, particularly by pushing commodity prices down (Indonesia being a big commodity exporter) and also curbing external demand for other exports from Indonesia.
The Global Economic Picture
The recovery of the economy of the United States goes gradually. On the one hand this is positive because a stronger US economy (the world's top economic strength) will automatically give a boost to global growth. On the other hand a strengthening US economy will provide the correct context for the US Federal Reserve to push for further monetary tightening in the US economy (particularly by raising interest rates). For emerging markets like Indonesia US monetary tightening will most likely trigger severe capital outflows. However, such shocks will only be of a temporary nature as Indonesia's fiscal and economic fundamentals have been strengthening in recent years.
Meanwhile, the economies of the European Union and Japan remain stagnant and cannot contribute to higher trade activity around the globe yet. However, more stimulus measures from the regions' central banks can give a temporary boost to equity markets (and may somewhat offset the negative impact of monetary tightening in the USA).
Lastly, concerns about China's hard landing have somewhat waned in recent months, particularly since August industrial output and retail sales have been stronger than expected. But still, China (the world's second-largest economy) is growing at a rather weak pace and therefore contributes significantly to lower global trade activity and falling commodity prices. Growth of China in 2017 is expected to be stagnant.
It is safe to say that - despite the challenging environment - the global economy has already touched its rock bottom (in terms of economic slowdown) - and therefore the only way to go is up (although at a very slow pace).
Economic Fundamentals of Indonesia
Pardede sees tight tight fiscal conditions in Indonesia, reflected by the recent decision of the Indonesian government to cut public spending by IDR 137 trillion in the remainder of 2016. This move is needed to prevent the government budget from widening too much. However, lower government spending will also cause missed opportunities for the Indonesian economy and therefore Indonesia's GDP growth realiziation is now projected at around 5.1 percent (y/y) in 2016.
Meanwhile, Pardede believes that the economic policy packages that have been released by the Indonesian government since September 2015 (and include matters such as deregulation and tax incentives to attract investment) will only start to have a positive effect on the economy in the second half of 2017.
Economic Stimulus Packages of the Indonesian Government:
|• Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
|• Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
|• Cut energy tariffs for labor-intensive industries|
|• Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
|• Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
|• Tax incentives for investment in special economic zones|
|• Waive income tax for workers in the nation's labor-intensive industries
• Free leasehold certificates for street vendors operating in 34 state-owned designated areas
|• Scrap income tax for 21 categories of airplane spare parts
• Incentives for the development of oil refineries by the private sector
• One-map policy to harmonize the utilization of land
|• Single billing system for port services conducted by SOEs
• Integrate National Single Window system with 'inaportnet' system
• Mandatory use of Indonesian rupiah for payments related to transportation activities
• Remove price difference between private commercial and state postal services
|• Removing foreign ownership cap on 35 businesses
• Protecting small & medium enterprises as well as cooperatives
|• Lower tax rate on property acquired by local real estate investment trusts
• Harmonization of customs checks at ports (to curtail dwell time)
• Government subsidizes loans for export-oriented small & medium enterprises
• Roadmap for the pharmaceutical industry
|• Enhancing the ease of doing business in Indonesia by cutting procedures, permits and costs|
|• Deregulation for residential property projects for low-income families|
Next year, Pardede also expects that several sectors will grow and thus contribute to accelerating economic growth of Indonesia. These sectors include crude palm oil, infrastructure, manufacturing, online trade and property.
Another matter that supports economic growth in Indonesia in 2017 is stronger support for the Joko Widodo-led government. Not only the Indonesian population has stronger confidence in the government (based a surveys conducted by Sjaiful Muljani Consulting and CSIS) but President Widodo can also rely on bigger support in Indonesian parliament. After Golkar decided to back Widodo's coalition, it now controls 386 seats in parliament, while the Merah-Putih coalition controls only 174 seats (when Widodo just entered office in late 2015 he was only supported by a minority coalition).
A high degree of political and popular support will make it easier for the government to implement reforms that will create a better economic model on the long term, but will cause some pain on the near term (a good example of this is the winding down of energy subsidies).
Several matters that give room to pessimism about Indonesia's economic growth, however, are weak credit growth, a tax amnesty program that may not live up to expectations, and weak job creation.
Recently, the Indonesian government set its economic growth target for 2017 at 5.1 percent (y/y) in the state budget. However, contrary to its habit of overestimating economic growth, the government seems to (deliberately) have set a target that is too low. If somewhere in 2017 the government will revise its projection upwards then it can generate positivity that will result in additional capital inflows into Indonesian stocks and bonds.
2017 State Budget
annual percent change
annual percent change
|3 - 5|
percentage of labor force
percentage of population
Sources: Finance Ministry & Commission XI DPR
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)