Bank UOB Indonesia expects the economy of Indonesia to accelerate to a growth pace of 5.2 percent year-on-year (y/y) in 2017, from an estimated 5.0 percent (y/y) this year. Economic acceleration of Indonesia comes despite expected slowing global economic growth. Kevin Lam, President Director at Bank UOB Indonesia, stated infrastructure development and the government's economic policy packages will boost the economy and generate employment thus stimulating household consumption.
Since September 2015 the Indonesian government under the leadership of Joko Widodo has released 14 economic policy packages that aim at boosting the domestic economy and create a more attractive and stable investment climate. Examples are the introduction of fixed minimum wage growth (that gives more certainty to investors), deregulation, easier procedures for investment, as well as scraping double taxes in the real estate, investment trusts, and e-commerce sectors.
According to research conducted by Bank UOB Indonesia, these packages have already had a positive impact. The UOB Asian Enterprise Survey 2016 shows that a quarter of surveyed companies in Asia select Indonesia as the country to expand to in the next five years. Moreover, over the past couple of years more and more multinationals and Asian companies have expanded to Indonesia. Since 2013 the Foreign Direct Advisory Unit of Bank UOB Indonesia assisted more than 70 companies for the establishment of a branch in Indonesia. It involves companies in various sectors, including agriculture, mining, construction, consumer goods, logistics, transportation, and trade.
Regarding president-elect Donald Trump, UOB Group Senior Economist Suan Teck Kin states that global financial markets are plagued by heavy volatility as investors are currently waiting for more clarity about the direction of Trump's economic and political policies. However, on the long term, Kin is confident that Trump will continue the tradition of US pragmatism and thus cooperate with ASEAN countries in terms of trade and investment. Particularly Southeast Asia is attractive as this region remains among the highest growing regions worldwide.
After China, Japan, Singapore, and the European Union (EU), the USA is the fifth-largest trading partner of Indonesia. In 2015 Indonesia's total exports to the USA reached USD $16.2 billion, while imports from the world's number one economy stood at USD $7.6 billion (hence Indonesia has the upper hand in this trade relation). However, there is concern that Trump will encourage a more protectionist approach and exit key freed trade deals including the Trans-Pacific Partnership.
Meanwhile, former Indonesian Finance Minister Chatib Basri expects capital inflows into Indonesia to be less impressive in 2017 compared to this year as the US Federal Reserve is set to tighten its monetary policy. In fact, there may be several interest rate hikes provided Trump will engage in massive public spending to boost the US infrastructure and the economy. Basri added he does not expect to see a Fed Funds Rate hike in December 2016.
Limited capital inflows into Indonesia next year imply that the Indonesian rupiah will somewhat weaken against the US dollar. However, some slight currency depreciation is positive as it would boost Indonesia's export performance (a weak currency enhances the competitiveness of Indonesian export products). Considering Indonesia is transforming its economy from commodity-driven to manufacturing-driven a weaker currency should therefore be regarded a positive matter.
However, although capital inflows into Indonesia in 2017 will not be as good as in 2016, Basri is confident that foreign investors will not forget about Indonesia as soon as the Fed hikes its interest rate regime due to Indonesia's lucrative and strong economic fundamentals. Moreover, central banks in the EU and Japan still maintain their ultra loose monetary policies. These funds should find their way to emerging markets such as Indonesia.
According to data from Indonesia's central bank (Bank Indonesia), a total of IDR 157 trillion (approx. USD $11.8 billion) worth of capital inflows in the first ten months of 2016.
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
Poll Indonesia Investments:
Where do you see Indonesia's economic growth in full-year 2016?
Voting possible: -
- Between 5.0% - 5.2% (55%)
- Between 5.2% - 5.4% (19%)
- Below 5.0% (15.5%)
- More than 5.4% (10.5%)
Total amount of votes: 611