The government of Indonesia agreed with the House Budget Committee to adjust the economic growth target of Southeast Asia’s largest economy in 2015 to 5.8 percent, 0.2 percentage point up from the initial growth target proposed by the government in the Financial Memorandum as well as the 2015 State Budget Draft (APBN). Still, the 5.8 percent gross domestic product (GDP) growth target constitutes the lowest growth target set in Indonesia’s state budget (excluding revised state budgets) since the year 2010.
Before being brought to the Working Committee meeting, the government first discussed the macroeconomic assumptions with Commission XI of the parliamentary. In this meeting, the PDI-P party - winner of the legislative election in April 2014 and the party which threw its support behind Joko Widodo (who will become Indonesia’s seventh president) - requested for a higher GDP growth target. As the PDI-P is the largest ruling party in the government that will be inaugurated in October 2014, it also has the largest input in governing, including discussions regarding macroeconomic targets.
"There are several factors that make us more optimistic about domestic economic growth. This includes the recovery in global commodity prices and economic recovery in the USA," said Chairman of the PDI-P’s Economic Team Arif Budimanta in the House’s Commission XI.
He is also optimistic that the new Joko Widodo-led administration brings new hope that can trigger investment growth. Joko Widodo, popularly known as Jokowi, has been the market-favorite in the 2014 elections.
Commission XI agreed to the new growth target of 5.8 percentage point without going through a lengthy debate. Initially, the government only targeted for a growth pace of 5.6 percent in 2015 due to several factors such as:
• a global economic growth forecast of 4 percent, higher than 3.4 percent in 2014
• a global trade growth forecast of 5.3 percent, higher than the 4 percentage point projection in 2014. This will encourage export performance to increase 4.4 percent, higher than in 2014 when it is expected to grow by 1.4 percent only.
• due to enhanced certainty about investment and employment programs of the new government, investments in Indonesia are expected to grow by 5.8 percent, higher than the 5.5 percentage point growth projected in 2014.
• Risks caused by US tapering off and which can lead to capital outflows from Indonesia. Negative factors also come from a possible increase in the US interest rates.
Deputy Governor at Indonesia’s central bank (Bank Indonesia), Perry Warjiyo, said that achieving the 5.8 percentage point growth target will be highly dependent on the global economy, the acceleration of infrastructure development in Indonesia as well as government budgets.
"Global economic recovery, especially in the United States, will boost Indonesian exports. Furthermore, infrastructure will boost investment and optimal budget allocations will drive growth,” Warjiyo said.
Apart from agreeing on the economic growth target, the Commission also approved three other macroeconomic assumptions, namely the exchange rate, inflation and three-month treasury notes (SPN).
The Indonesian rupiah exchange rate was agreed at IDR 11,900 per US dollar. This exchange rate is the same as that proposed by the government through the Financial Note and State Budget Commission XI which had set it in the range of IDR 11,600 to 11,900 although initially the PDI-P proposed an exchange rate at IDR 11,600 per US dollar.
Inflation was agreed at 4.4 percent, similar to the figure proposed by the government through the Financial Note and State Budget 2015. This 4.4 percent inflation figure does not include changes in administered prices (such as fuel price increases). As for every IDR 1,000/liter fuel price increase, it is expected that inflation will rise 1.2 percent. This means that if subsidized fuel prices are raised by IDR 3,000 (as has been mentioned by the team of Jokowi) then it can cause inflation of 9.9 percent.
Besides these four macroeconomic assumptions, there are three more that need approval. These are oil lifting, gas lifting, and the crude oil price. Commission VII will discuss these targets first.
By mid-September, the seven macroeconomic assumptions are expected to be finalized and decided upon.