Traditionally, the Indonesian President reveals the government's proposal for next year's state budget one day ahead of the Independence Day celebrations. This time, President Joko Widodo announced a rather ambitious target in terms of economic growth. The central government proposes the GDP growth target figure for 2018 at 5.4 percent year-on-year (y/y). The budget proposal requires approval from the House of Representatives (DPR).
There exists some skepticism whether the 5.4 percent (y/y) GDP growth target for 2018 is realistic. In the first half of 2017 Indonesia's economic growth was rather stagnant at 5.01 percent (y/y) amid declining growth of household consumption (which traditionally accounts for about 55-60 percent of Indonesia's total GDP). Moreover, the global economy remains fragile, hence undermining Indonesia's export performance (although recent reports about improving forecasts for China's economic growth cause some reason for optimism).
Or perhaps the Widodo-led government changed its tactics for the 2018 state budget. When - back in 2016 - the government set a 5.1 percent (y/y) GDP growth target in the original 2017 state budget it was assumed that the government deliberately set a low target in an attempt to over-deliver, rather than under-perform. Perhaps this tactic slightly backfired and the government wants to set a more ambitious target in the 2018 state budget to "keep everyone on their toes".
Although highly dependent on global conditions, it is important for Widodo to push for accelerated economic growth before the end of his first term in the second half of 2019. If not, his political opponents have plenty of ammunition to criticize Widodo (who once pledged to deliver 7 percent economic growth during his presidential campaign in 2014).
Therefore, he will need to focus on matters that are within his reach and can bear fruit on the short or medium term. These matters include direct investment and government spending (including infrastructure development). Total government spending is proposed to reach IDR 2,204.4 trillion (approx. USD $164.8 billion) in 2018, up 5 percent (y/y) from the 2017 target. Government spending includes a higher infrastructure budget at IDR 20.7 trillion. Infrastructure development remains one of the key focuses of the Indonesian government as it causes the so-called multiplier effect. However, it remains complex to see the start (and completion) of big infrastructure projects (for example power plants and toll roads) without any delay. Still, the government's infrastructure push is a very positive matter. However, the only question is: will Widodo be able to enjoy the fruits of his efforts? If various projects, initiated in the 2014-2016 period, would be completed in 2018 or early 2019 then it would definitely improve his chances of being reelected in 2019.
Meanwhile, in the 2018 state budget proposal the central government allocated less funds for defense and domestic security, while civil servant wages were left unchanged.
Both foreign and domestic investment rebounded strongly in the second quarter of 2017 (both in rupiah and US dollar terms), which is a very positive development. This momentum could be extended if the government decides to open more opportunities for foreign investment by revising the Negative Investment List later this year.
Meanwhile, the Indonesian government expects the 2018 budget deficit to reach 2.19 percent of GDP, or IDR 324.5 trillion, down from the 2.93 percent of GDP target in the revised 2017 budget (the legal limit is at 3 percent of GDP).
Indonesia's 2018 State Budget Proposal:
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