Central Bank: Economy of Indonesia Expected to Grow 4.89% in 2015
Agus Martowardojo, Governor of Indonesia’s central bank (Bank Indonesia), said on Thursday (27/08) that the nation’s economic growth pace is expected to reach 4.89 percent (y/y) in full-year 2015, down from 5.0 percent (y/y) in the preceding year and it would mark the fifth straight year of economic slowing. Earlier this week, Bank Indonesia had already revised down its economic growth forecast to the range of 4.7 - 5.1 percent (y/y) in 2015 (from 5.0 - 5.4 percent previously).
In the first and second quarter of 2015 Indonesia’s gross domestic product (GDP) expanded by an annual 4.72 percent and 4.67 percent, respectively. The primary reasons why Indonesia’s economy has been slowing in these quarters are sluggish economic growth (particularly China’s economic slowdown results in Indonesia’s weakening export performance as demand for commodities and other products decline), weakening purchasing power and household consumption (as Bank Indonesia maintains a high interest rate environment to combat high inflation and support the ailing rupiah), and slow government spending (due to bureaucratic turmoil).
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Concerns about the global economy (particularly the economy of China) persist, reflected by recent volatile financial markets across the globe, and therefore commodity prices will most likely remain low in the foreseeable future (implying that Indonesia’s export performance will remain sluggish in the time ahead). Household consumption in Indonesia is also expected to remain weak as Bank Indonesia lacks room to cut its benchmark interest rate (BI rate) amid current market conditions. As such, investors and analysts put their hope in government-led investment (particularly infrastructure development) to cause a multiplier effect and boost economic growth. But it is important that the government improves its performance in the remainder of the year. In the first six months of 2015 the Indonesian government only spent about 11 percent of its USD $20 billion infrastructure budget.
Bank Indonesia is optimistic that economic growth in 2016 will rebound. Governor Martowardojo said the nation’s economy is forecast to grow 5.54 percent (y/y) next year. However, this may be a too optimistic view as it would require significant improvement of external conditions (higher commodity prices and healthier global economic outlook).
Martowardojo added that the central bank expects the country’s current account deficit to improve to 2.16 percent of GDP in 2015, below its earlier forecast of 2.2 percent and down from the 2.9 percent of GDP current account deficit in 2014. Since 2011, Indonesia has been plagued by a structural current account deficit which undermines investors' confidence in the country's financial fundamentals. Generally, a current account deficit below 3 percent of GDP is labelled sustainable.