According to Indonesian Finance Minister Sri Mulyani Indrawati the economy of Indonesia will grow 5.1 percent (y/y) in 2016, slightly below the target that was set by the central government in the 2016 State Budget (5.2 percent y/y). This slightly less rosy view is caused by the decision to cut government spending by IDR 137.6 trillion (approx. USD $10.4 billion) this year in order to combat a widening budget deficit (that is mainly caused by weaker-than-targeted tax revenue). A cut in state spending means that the government has less funds to boost economic growth.
If the government of Indonesia wants to achieve its gross domestic product (GDP) target of 5.2 percent (y/y) in 2016, then the nation's economic growth needs to reach at least 5.35 percent (y/y) in the second half of the year. According to Finance Minister Sri Mulyani it will be very difficult to achieve this growth figure in the remainder of the year, especially now the government is eager to cut spending. Government spending's role toward the nation's overall economic growth has become increasingly important during the presidency of Joko Widodo. According to Statistics Indonesia, government spending contributed 9.44 percent to Indonesia's GDP in the second quarter of 2016.
Indonesia's GDP growth reached 5.04 percent (y/y) and 5.18 percent (y/y) in the first and second quarter of 2016, respectively.
Although household consumption has been recovering in Indonesia after a slowdown in the years 2011-2015 (amid falling commodity prices), the strength of government consumption will now somewhat retreat due to an adjustment (budget cuts). Initially, Sri Mulyani had hoped that rising gross fixed capital formation (GFCF) could offset the negative impact of government spending cuts. However, GFCF growth has been bleak at around 5 percent (y/y) so far this year. Ideally, GFCF growth touches around 10 - 11 percent (y/y).
Another issue that negatively impacts on Indonesia's economic growth is sluggish global economic growth, in particular the continuation of the economic slowdown in China, the world's second-largest economy and one of the biggest trading partners of Indonesia. Since 2011 China has been in slowdown-mode and this puts downward pressure on commodity prices. For Indonesia, a key exporter of crude palm oil and coal, commodities are important foreign exchange earners. Thus, Indonesia's export performance has been weakening (rather drastically) ever since the fourth quarter of 2014. Unfortunately, positive global economic growth - at around 3 percent (y/y) in Q2-2016 - failed to boost Indonesia's export performance.
Another example that indicates the sluggish global conditions according to Sri Mulyani is the saturated global value chain. Previously, giant companies such as Apple or Samsung ordered many components from various emerging markets in Asia, hence boosting trade activity. It will require a new industrial revolution, such as a robotic or artificial intelligence revolution, to boost the global value chain again.
Meanwhile, Bank Indonesia Governor Agus Martowardojo said the central bank recently cut its outlook for Indonesia's economic growth to the range of 4.9 - 5.3 percent (y/y), from 5.0 - 5.4 percent (y/y) previously. He added that investors remain positive about the nation's economic fundamentals and government policies, including the tax amnesty program.
Up to mid-August capital inflows totaled IDR 162 trillion (approx. USD $12.3 billion) so far this year, far more compared to the IDR 43 trillion worth of capital inflows into Indonesia's financial markets in the same period one year earlier. This is also partly the reason why the Indonesian rupiah has appreciated 3.9 percent against the US dollar year-to-date. However, recent hawkish statements of Federal Reserve officials have caused capital outflows over the past week and therefore a looming US interest rate hike remains one of the top challenges for Indonesia right now.
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
Poll Indonesia Investments:
Where do you see Indonesia's economic growth in full-year 2016?
Voting possible: -
- Between 5.0% - 5.2% (55%)
- Between 5.2% - 5.4% (19%)
- Below 5.0% (15.5%)
- More than 5.4% (10.5%)
Total amount of votes: 611
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