Update COVID-19 in Indonesia: 24,538 confirmed infections, 1,496 deaths (28 May 2020)
28 May 2020 (closed)
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The Asian Development Bank (ADB) has revised its economic growth forecast for Indonesia in 2015 from 5.2 percent year-on-year (y/y) to 5 percent (y/y). During a press conference on Tuesday (07/07) in Jakarta, Edimon Ginting, Deputy Country Director for Indonesia of the Philippines-based ADB, said that there are three reasons that explain why the ADB has become less optimistic about Indonesia’s gross domestic product (GDP) growth in 2015. Last year, Indonesia’s economic growth slowed to a five-year low of 5.02 percent (y/y).
The three factors that have caused the downward revision of the ADB’s economic growth forecast for Indonesia in 2015 are slow government spending, weak results of government reform programs, and weak export performance. On the back of these factors Indonesia’s GDP growth had already slowed to a six-year low of 4.71 percent (y/y) in the first quarter of 2015, which was far below ADB expectations, but the influence of these factors are estimated to persist throughout 2015.
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Slow Government Spending
In the Revised 2015 State Budget, the government earmarked IDR 290 trillion (approx. USD $21 billion) for much-needed infrastructure spending in Indonesia (such as roads, bridges, airports, power plants and seaports). However, in the first six months of 2015 only 8 percent of these funds had been spent. This poor performance is primarily due to severe bureaucracy (including difficulties of land acquisition) and the late approval of the Revised 2015 State Budget by Indonesia’s House of Representatives, leading to the delay of government-led infrastructure development.
Such infrastructure projects are expected to cause a multiplier effect in the economy as various related industries will grow accordingly. It is expected that in the second half of 2015 we will see the kick-off of more infrastructure projects. However, this is too late to impact significantly on GDP growth in 2015.
Moreover, Indonesia’s tax revenues are lower than initially estimated. Yesterday (06/07), Indonesian Finance Minister Bambang Brodjonegoro said that government revenue from tax and excise stood at IDR 393 trillion (USD $29.5 billion) in the first five months of 2015, or a mere 26 percent of the target that had been set in the 2015 State Budget. This poor performance is due to low global commodity prices and Indonesia’s slowing economic (impacting heavily on companies’ corporate earnings hence on tax payments to the government). Meanwhile, revenue from royalties and fees stood at IDR 83 trillion (USD $6.2 billion) in the January-May 2015 period, or 30 percent of the government target.
Impact Economic Reform Programs
During his successful presidential campaign last year, Indonesian President Joko Widodo promised to implement structural reforms in the Indonesian economy in order to raise Indonesia’s economic growth to 7 percent (y/y) by the end of his first five-year term. Widodo, locally known as Jokowi, kept his promise by largely scrapping fuel subsidies at the start of 2015 (a relatively easy move as global petroleum prices had sunk to dramatic lows). However, as petroleum prices have been recovering since the start of 2015, there are currently heavy inflationary pressures in Indonesia (inflation accelerated to 7.26 percent y/y in June 2015), and which keep the central bank from cutting its benchmark interest rate (now at a relatively high level of 7.50 percent), hence limiting economic growth as credit expansion and people’s purchasing power has been reduced.
The ADB does emphasize that these inflationary pressures are only temporary and will decline towards the end of the year. Moreover, the scrapping of fuel subsidies is considered a positive step as they had been distorting the economy by keeping fuel prices artificially low. Furthermore, after scrapping fuel subsidies, the government has more funds that can be allocated to infrastructure development.
Other reform programs implemented by the Jokowi administration include the integrated one-stop service center (Pelayanan Terpadu Satu Pintu, abbreviated PTSP) at the Indonesia Investment Coordinating Board (BKPM) to simplify licensing procedures for investment in Indonesia, and better regulations in the context of land acquisition (problems related to the acquisition of land form a notorious obstacle to infrastructure projects in Indonesia).
Although these reforms are all well received by the ADB, they failed to make a significant positive contribution to economic growth in the first half of 2015. However, they will contribute to accelerated economic growth in the future.
Weak Export Performance
Thirdly, Indonesia’s export performance is highly dependent on commodity exports (agriculture and mining). Given the current low commodity prices (and little expectation of a rebound in the near future), Indonesian exports cannot improve markedly in the period ahead. Weak commodity prices are the result of sluggish economic growth, particularly slowing growth in China, a key trading partner of Indonesia.
According to the latest data of Badan Pusat Statistik (Statistics Indonesia), Indonesia posted a USD $950 million trade surplus in May 2015, the sixth consecutive monthly trade surplus. Although this is a positive result, a closer look at the country’s trade data shows that domestic and global activity has weakened as Indonesian imports fell 21.4 percent (y/y) to USD $11.6 billion in May, while exports fell 15.2 percent to USD $12.6 billion, the eight straight month of falling imports and exports.