The latest World Bank projection shows the economy of Indonesia remains promising despite the Washington-based institution having lowered its forecast for Indonesia's full-year 2017 gross domestic product (GDP) growth by 0.1 percentage point to 5.2 percent year-on-year (y/y) in the June 2017 edition of its Global Economic Prospect. The World Bank emphasized the Indonesian economy remains relatively strong and is among the most promising emerging markets.
Despite the slightly downward revised outlook (in January 2017 the World Bank still had its forecast for Indonesia's economic growth at 5.3 percent in 2017), the World Bank is still more optimistic about Indonesia's 2017 GDP growth compared to the Indonesian government's outlook. In the Revised 2017 State Budget the Indonesian government agreed to a 5.1 percent GDP growth target this year. However, after years of under-performing (primarily caused by setting too ambitious targets), the Indonesian government seems eager to over-deliver this time and therefore decided to set a not-too-ambitious target. Still, considering Indonesia's Q1-2017 GDP growth was only recorded at 5.01 percent (y/y) it would require significant acceleration to achieve the World Bank's outlook by the year-end.
The World Bank stated that generally rising commodity prices contribute to Indonesia's expanding GDP. Moreover, Indonesia's recent sovereign credit rating upgrade to investment grade status (by Standard & Poor's) is expected to open a pool of funds into Indonesia (originating from conservative institutional investors) as Indonesia has now obtained investment grade status from all three key global credit rating agencies. This upgrade is partly attributed to the ongoing reform program (including deregulation) of the Indonesian government.
This should also translate to a stronger (or at least stable) rupiah exchange rate. However, over the past couple of months we have seen Indonesia's central bank (Bank Indonesia) intervening in markets in order to limit the rupiah's appreciation. This is done in an attempt to keep Indonesian exports attractive.
But the above-mentioned matters are positive. So what explains the World Bank's 0.1 percentage point downward revision of its forecast for Indonesia's economic growth in 2017? The World Bank notes that the Indonesian economy will be affected by tightening fiscal room for government spending. With expectation of lower-than-expected government spending, household consumption would fall accordingly. Meanwhile, despite recently rising commodity prices, there is concern that this recovery cannot be continued in the second half of 2017. This would put additional pressure on household consumption in Indonesia (which accounts for about 57 percent of total GDP).
Regarding global economic growth, the World Bank lefts its outlook unchanged (from its January 2017 outlook), with global growth estimated at 2.7 percent in 2017, followed by 2.9 percent in both 2018 and 2019. This outlook is supported by rising manufacturing activity and trade as well as stable commodity prices.
World Bank's Real GDP Projections: