The central bank of Indonesia (Bank Indonesia) expects Indonesia's economic growth to reach between 4.9 and 5.0 percent (y/y) in the second quarter of 2016, only rising slightly from GDP growth realization of 4.92 percent in the first quarter. Growth is forecast to remain subdued as Indonesia's household consumption has not improved markedly yet (reflected by low demand for credit). Meanwhile, the global economic context remains plagued by uncertainties, particularly ongoing concern about the economies of the USA, China and Europe.
Mirza Adityaswara, Deputy Governor at Bank Indonesia, says the Indonesian economy is highly dependent on the global economy, especially now the domestic engine of economic growth - household consumption (accounting for about 58 percent of the nation's total economic growth) - remains growing at a subdued pace. But with the global economy having been under pressure, there is limited room for Indonesia to see markedly accelerated economic growth in the second quarter. Indonesia is a key commodity exporter and with commodity prices at a persistently low level due to weak global demand, Indonesia's export performance has little room to improve. Moreover, the recently strongly appreciating rupiah exchange rate does not make Indonesian exports more attractive for foreign importers. Therefore, Bank Indonesia is expected to prevent the rupiah from strengthening too strong in a bid to support the nation's manufacturing exports.
Besides the subdued global outlook and sluggish domestic consumption, Bank Indonesia also detects weaker-than-estimated private investment in Indonesia. This is also a reason why the institution cut its GDP growth forecast for Indonesia in Q2-2016 from the range of 5.0 - 5.4 percent (y/y) to 4.9 - 5.0 percent (y/y). Private businesses have become more careful due to the uncertain economic environment and are therefore currently eager to focus on debt repayment rather than seeking new debt from creditors.
However, Bank Indonesia is optimistic that Indonesia's economic growth can improve in the second half of 2016 as the impact of monetary easing is expected to be felt. Recently, Indonesia's central bank cut its benchmark interest rate (BI rate) gradually, yet aggressively, from 7.50 percent to 6.50 percent. Furthermore, it set lower down payment requirements for property purchases. It is expected that the fruits of this looser monetary policy are to be felt in the second half of the year. Also Indonesia's tax amnesty program is estimated to bring home trillions of rupiah in funds. Capital inflows should manage to strengthen the rupiah and boost the nation's foreign exchange reserves.
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
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Source: Statistics Indonesia (BPS)