In its latest East Asia and Pacific Economic Update, titled "Reducing Vulnerabilities", the World Bank stated that it projects Indonesia's gross domestic product (GDP) to grow by 5.1 percent (y/y) in 2016 and 5.3 percent (y/y) in 2017 mainly supported by rising private consumption, a relatively stable rupiah rate, fiscal support (including higher personal income tax threshold), and accelerating government spending. Overall, the World Bank expects growth in developing East Asia and the Pacific to remain resilient over the next three years.
The economy of Indonesia remained resilient amid the sluggish global environment, most likely ending the slowing economic growth trend that occurred in the years 2011-2015. According to the World Bank, the key reasons why Indonesia did well so far are sound monetary policy and higher public investment. Higher government investment encourages rising domestic economic activity. However, recently the Indonesian government decided to cut IDR 134 trillion in public spending in the second half of 2016 in order to relieve pressure on the widening budget deficit and therefore public spending will play a smaller role in the next couple of months.
Several risks and challenges that are being faced by Indonesia include the difficulty of revenue collection as commodity prices remain low (despite recently rising prices of coal, base metals, rubber and palm oil), while tax collection remains weak (despite a seemingly successful tax amnesty program). Furthermore, the El Nino and La Nina weather phenomenons have (or will) negatively affect agricultural output leading to some inflationary pressures.
The World Bank also noted that significant improvements in fiscal management and a more ambitious reform process are required for a sustained boost to economic growth in Indonesia. This particularly concerns the nation's trade and investment policies.
Selected Indicators Indonesia:
- Indonesia's GDP rose by 5.0 percent in the first half of 2016, slightly higher compared to growth in the same period one year earlier.
- Indonesia's private consumption grew by 5.0 percent in the first half of 2016, hence driving overall economic growth.
- Government consumption rose in Q2-2016 but the slow start of government spending highlights persistent problems related to government expenditure disbursement.
- Private investment growth rose in Q2-2016. However, this pickup has remained elusive. Much-needed direct investment remained subdued.
- Moderate domestic demand and lower energy prices have led to low inflation (low for Indonesian standards) at slightly above 3 percent (y/y) in September 2016.
- The combination of accelerating GDP growth and lower inflation caused Indonesia's poverty rate to drop by 0.2 percentage points to 10.9 percent in March 2016.
- Indonesia's export performance continued to decline in the first six months of 2016 but at a lower pace compared to one year earlier as prices of several commodities improved. Imports also contracted in H1-2016 but (also) at a lower pace compared to one year earlier. Capital inflows into Indonesia improved in recent months (particularly into government bonds).