The central bank of Indonesia (Bank Indonesia) expects the nation's gross domestic product (GDP) growth to be below earlier estimates in both the first and second quarters of 2017. However, the lender of last resort remains optimistic that Indonesia's full-year economic growth can reach a pace of 5.2 percent year-on-year (y/y), accelerating from 5.02 percent (y/y) in the preceding year.
Bank Indonesia Governor Agus Martowardojo said one of the factors that undermines economic expansion of Southeast Asia's largest economy in the first quarter of the year is bleak credit growth in the banking sector. As Indonesian banks are currently focused on combating the high non-performing loan (NPL) ratio, which is hovering above 3 percent (gross), they are cautious with credit disbursement. This more selective strategy should resolve a big chunk of bad loans and thus improve banks' NPL ratio.
Martowardojo expects Indonesia's Q1-2017 GDP growth to fall below 5.05 percent (y/y). Another (related) factor is weaker-than-estimated domestic consumption. Despite recovering commodity prices, a stable rupiah, controlled inflation and low interest rates, Martowardojo detects bleak domestic consumption, remaining below earlier expectations and therefore undermining Indonesia's macroeconomic growth (domestic consumption accounts for about 58 percent of total economic growth in Indonesia).
Besides domestic factors there remain several external factors that impact negatively on the Indonesian economy in the first half of 2017. Under the Donald Trump administration the USA has become a more protectionist nation in terms of trade and investment, while the US Federal Reserve is eager to raise its key interest rate again later this year, while expected to begin trimming its USD $4.5 trillion balance sheet towards the end of 2017. The monetary, economic and political policies in the USA have a significant impact on emerging markets, including Indonesia.
Overall, however, Martowardojo sees a strong Indonesian economy despite the challenges. Between 2005 and 2015 the economy of Indonesia grew at an average of 5.8 percent (y/y) per year, while the global economic picture is better in 2017 compared to the preceding years (which should translate to further improving exports, investment and commodity prices).
Meanwhile, Mirza Adityaswara, Senior Deputy Governor at Bank Indonesia, added the nation's economic growth will surpass the level of 5.2 percent (y/y) in the last two quarters of 2017.
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
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Source: Statistics Indonesia (BPS)