It was a solid year for the Indonesian economy. The macroeconomic fundamentals of the nation have strengthened due to the hard work of the Indonesian government under the leadership of President Joko Widodo. However, there is no room for complacency as there remain major bottlenecks, while legislative and presidential elections - in which voters can approve or disapprove Widodo's performance - are scheduled for 2019.
If the Indonesian government manages to continue - and possibly - improve its performance, then chances are big that Joko Widodo (who is already leading the reliable opinion polls) will be allowed a second (and final) five-year term in the presidential seat. But he faces challenges.
The biggest challenge is overall economic growth (gross domestic product, or GDP). Over the past couple of years Indonesia's GDP growth has been stuck around the 5.0 percent year-on-year (y/y) level amid weak global demand (low commodity prices) and lower-than-usual domestic consumption growth. Widodo once pledged (during his presidential campaign in 2014) to guide Indonesia back to a 7 percent (y/y) growth rate by 2019. This is not possible and therefore can be regarded a failure in the eyes of his critics.
On a positive note, since 2015 Indonesia's economic growth has been accelerating (although at a very modest pace). The pace of acceleration is expected to rise as more and more government-led infrastructure development projects are completed, triggering the so-called multiplier effect.
Another challenge is to boost household consumption in Indonesia. The nation's household consumption growth has been slowing and it is still a bit of a mystery why it has been slowing. Various reasons have been mentioned: people prefer to save their money at banks (hence banks' third-party funds have been rising rapidly), consumers are less inclined to spend their money amid the country's easing inflation rate, while others argue that data are distorted as "traditional" retail sales are weakening due to rising e-commerce shopping.
The third challenge is related to the second one. Indonesia's credit growth was only recorded at 8.16 percent (y/y) per October 2017, while Indonesia had actually become used to double-digit credit growth figures. But apparently, local businesses are still rather reluctant to take on loans to finance business expansion amid the nation's bleak household consumption, while individuals are hesitant to use mortgages to finance the purchase of a house or a loan to buy a car.
Indonesia's central bank (Bank Indonesia) has played its part in trying to boost credit growth. Since the start of 2016 Bank Indonesia lowered the benchmark interest rate by 200 basis points to 4.25 percent. So far, however, the impact has been weak.
The fourth challenge for the government is to keep radical Muslim voices outside the political and judicial domains. Big demonstrations, organized by hardliners, managed to put significant pressures on the government and courts (for example the two-year prison sentence of former Jakarta governor Ahok) and - even more dangerous - there are politicians who embrace these radicals. Not because these politicians share the hardline ideology but simply because they can use hardliners' support for political gain.
Now, we turn to the positive developments in 2017. Firstly, last week credit rating agency Fitch Ratings upgraded Indonesia's sovereign rating to BBB (from BBB- previously) due to the strengthening macroeconomic fundamentals of Indonesia (specifically it cited policy making that consistently aims at maintaining financial and fiscal stability, a more flexible rupiah exchange rate policy, successful efforts to curb a sharp rise in corporate external debt, financial deepening, improved market stability, more realistic assumptions in the annual state budgets, strong GDP growth, and a low general-government debt burden of 28.5 percent of GDP in 2017).
Inflation has eased significantly to 3.30 percent (y/y) in November 2017, a very low rate for Indonesian standards. This shows that the government has been able to control stable food prices. Possibly, the government has successfully acted against the "mafia" (for example rice mafia or beef mafia) that often succeeded in pushing prices up before releasing new supplies on the market (in order to make more profit). Also in other ways the government has successfully stabilized food prices. For example, when there was scarcity of a certain product, additional import allocations were rapidly allowed.
Investors are also aware about strengthening economic fundamentals and therefore the benchmark Jakarta Composite Index has been touching all-time record highs in the last days ahead of the start of 2018, while initial public offering (IPO) realizations have also touched a record (36 so far in 2017).
The global economic picture is also improving, hence giving rise to stronger commodity prices (important because Indonesia is a big commodity producer). Indonesia's manufactured goods exports have also accelerated although the high gas price remains an obstacle to domestic industries.
Foreign direct investment (FDI) realization also rose further in 2017 supported by the government's deregulation agenda. Meanwhile, in the the 2018 edition of the World Bank's Doing Business Index Indonesia ranks 72nd, jumping 19 positions from 91st in last year's ranking.
Another positive development is that the government's "One Million Houses" program is well on its way. In full-year 2017 a total of 830,000 new houses are expected to be realized (for the country's low income families), up from 805,169 units in 2016. Main obstacles in this program are conflicting regulation at the local level and the difficulty of acquiring land.
Meanwhile, Indonesia's electrification ratio (the ratio of Indonesian households that are connected to the country's electricity grid) rose from 91.16 percent in 2016 to 92.75 percent in Q3-2017, while about 43 percent of the government's power program has been completed. By 2019 the government wants to have added 35,000 MW to the nation's power capacity.
Back to infrastructure development, the government has again raised funds for infrastructure development in the 2018 state budget, reaffirming its commitment to build infrastructure in an effort to overcome various economic and social bottlenecks.
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