The primary reason why the ADB decided to cut its growth forecast is slower-than-expected private and public investment. Furthermore, uncertainty about the path of monetary policy in the United States, the European Union and Japan gives rise to volatile capital flows and this complicates macroeconomic management in developing Asia, including Indonesia. The ADB further states that policy makers, globally, need to resist moves toward protectionism that would only undermine the fragile economic recovery.

Sona Shrestha, ADB Deputy Country Director for Indonesia, sees some headwinds for Indonesia on the short-term but is generally optimistic about the long-term potential as the country's policy reforms take hold while the major industrial economies pick up.

Private consumption in Indonesia will be encouraged by higher minimum wages, an increase in the tax-free threshold and low inflation. This is important as household consumption is the key driver of Indonesia's economic growth, accounting for around 55 percent of total growth. Meanwhile, higher budget allocations for the government’s Village Fund, and better prospects for agriculture will boost the rural incomes in Indonesia.

However, macroeconomic growth is dampened due to the recent decision of the Indonesian government to cut public spending by IDR 137 trillion in the Revised 2016 State Budget in order to relieve mounting pressures on the government's budget deficit. Due to weaker-than-estimated government revenue the government needs to adjust its policies. Still, government spending on infrastructure development should accelerate toward the end of the year (it is a traditional phenomenon that government spending speeds up when approaching the year-end).

Meanwhile, private investment should benefit from the implementation of a series of economic policy reforms (the economic policy packages). Notable improvements include the opening of an additional 35 industries to foreign ownership, and significant deregulation which should streamline processes for securing business permits.

According to the latest data from the Indonesia Investment Coordinating Board (BKPM), foreign direct investment (FDI) in Indonesia in the first six months of 2016 amounted to USD $14.1 billion, up 1 percent (y/y) only.

However, the ADB warns that weaknesses in the labor market can dent consumer confidence in Indonesia. Although employment in rural areas picked up, the Indonesian economy saw an overall decline in the number of jobs generated over the 12 months to February 2016, from the previous year.

“While rural areas were able to absorb more labor due to a delayed harvest, the urban labor market shows signs of wage stagnation for educated workers, with post-secondary graduates increasingly accepting positions for which they are overqualified,” said Ms. Shrestha. “This trend coincides with low-skilled workers, particularly women, leaving the labor force.”

The ADB also mentioned that growth in the developing Asia’s export volumes slowed to 4.7 percent per year in the the 2011–2015 period, from an annual average of 11.2 percent during the years 2000–2010. Weak post-crisis demand from advanced markets for imports of Asian goods is a key cyclical factor that should reverse as the major industrial economies recover.

Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):

Year    Quarter I
   Quarter II    Quarter III    Quarter IV    Full-Year
2016        4.91        5.18
2015        4.73        4.66         4.74         5.04         4.8
2014        5.14        5.03         4.92         5.01         5.0
2013        6.03        5.81         5.62         5.72         5.6
2012        6.29        6.36         6.17         6.11         6.0
2011        6.45        6.52         6.49         6.50         6.4
2010        5.99        6.29         5.81         6.81         6.2
2009        4.60         4.37         4.31         4.58         4.6

Source: Statistics Indonesia (BPS)