20 January 2020 (closed)
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The central bank of Indonesia (Bank Indonesia) has become slightly less optimistic about Indonesia's economic growth in the third quarter of 2016. Bank Indonesia revised down its growth projection to below the 5 percent (y/y) mark for Q3-2016 (from an earlier forecast of 5.2 percent). However, the lender of last resort still expects to see a better performance compared to the 4.73 percent (y/y) pace posted in Q3-2015. Meanwhile, low inflation and a strong rupiah could result in another interest rate cut in Southeast Asia's largest economy.
Mirza Adityaswara, Deputy Governor of Bank Indonesia, stated that Indonesia's gross domestic product (GDP) growth is expected to touch 4.9 percent (y/y) in the third quarter of 2016, below earlier forecasts but still constituting an improvement from GDP growth realization in the same quarter one year earlier. The main reason why the central bank has become less optimistic about macroeconomic growth is the central government's decision to cut government spending by IDR 134 trillion (approx. USD $10.3 billion) in the second half of 2016, a decision directed at relieving pressures on the government's widening budget deficit. The budget for ministries/government agencies was cut by IDR 65 trillion, while the budget for transfers to the regions was cut by IDR 69 trillion in the Revised 2016 State Budget.
The better-than-expected 5.18 percent (y/y) economic growth pace of Indonesia in the second quarter of 2016 was largely attributed to government spending. But with government spending becoming less influential in the second half of 2016, the Indonesian economy is largely dependent on household consumption which has remained somewhat subdued so far.
Indonesian Finance Minister Sri Mulyani Indrawati said the government is aiming for a 5.0 percent (y/y) growth pace in full-year 2016 even though the global economy remains sluggish and full of uncertainties (most notably the looming US interest rate hike, a move that could - temporarily - give rise to significant capital outflows from Indonesia). She added that, considering growth in the second half of 2016 will be largely dependent on Indonesia's household consumption, the government needs to safeguard a low inflation environment in order to strengthen people's purchasing power as well as to strengthen consumer confidence.
On Monday (03/10) Statistics Indonesia announced that Indonesia's consumer price index expanded 3.07 percent (y/y) in September 2016, up from the 2.79 percent (y/y) pace in the preceding month but remaining at a comfortably low level (for Indonesian standards).
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
Indonesia's successful tax amnesty program, which already raised nearly IDR 100 trillion in additional tax revenue for the government, helps to plug the wide budget deficit (this deficit is expected to touch 2.6 or 2.7 percent of GDP in 2016) and this would imply that the government will not need to cut public spending again. However, although tax declarations and tax revenue have been better than expected, Indonesian authorities will still need to do their homework to attract more asset repatriations into Indonesia (from the so-called tax havens). This is important because these repatriations will surely guard Indonesia (specifically its rupiah rate) against heavy volatility when the US Federal Reserve decides to raise its Fed Funds Rate again.
In fact, seeing a large amount of fund repatriations into Indonesia could be reason for Standard & Poor's (S&P) to - finally - give the investment grade status to Indonesia. From the three big credit rating agencies, only S&P has not upgraded Indonesia to investment grade. A successful tax amnesty program can safeguard government spending, encourage funds to flow to infrastructure development, and enhance Indonesia's fiscal credibility. These are all matters likened by credit rating agencies.
Meanwhile, low inflation and the strong performance of Indonesia's rupiah exchange so far this year could be reason for Bank Indonesia to cut its benchmark interest rate again before the end of the year and, thus, boost Indonesia's economic growth.
Indonesian Rupiah versus US Dollar (JISDOR)| Source: Bank Indonesia
In the first half of 2016 Bank Indonesia cut its benchmark BI rate by one percent (gradually, yet aggressively) from 7.50 percent at the year-start to 6.50 percent as inflation and the current account deficit were under control, while the rupiah had been appreciating against the US dollar. Then, in August 2016, the central bank introduced the seven-day reverse repurchase rate (reverse repo) as its new benchmark. This new benchmark was introduced as it is regarded to influence borrowing costs and market liquidity more effectively compared to the BI Rate. This new benchmark was cut from 5.25 percent to 5.00 percent at the September 2016 policy meeting.
Meanwhile, Bank Indonesia also conducted monetary easing by lowering the primary reserve requirement by 150 basis points since December 2015, a move that helps to release more liquidity in Indonesia's banking sector.