In a meeting with Commission XI of Indonesia's House of Representatives (DPR) Indonesian Finance Minister Sri Mulyani Indrawati informed that it will be tough to achieve the 5.2 percent year-on-year (y/y) economic growth target as set in the government's Revised 2017 State Budget. In the first two quarters of the year Indonesia's gross domestic product (GDP) only expanded 5.01 percent (y/y) in each quarter.
A growth pace of 5.01 percent in H1-2017 implies that it would require significant accelerating economic growth in the remainder of the year to achieve the central government's target.
Finance Minister Sri Mulyani said her ministry has a range of forecasts for Indonesia's economic growth in full-year 2017. The optimistic view puts GDP growth toward 5.17 percent (y/y) in 2017. However, this optimistic forecast can only be achieved provided Indonesia's household consumption will rebound above the targeted 5.0 percent (y/y) growth level, while investment realization growth needs to reach 5.4 percent (y/y) in H2-2017. However, both these requirements seem tough considering current conditions.
Household consumption is crucial because it accounts for about 57 percent of Indonesia's total GDP. However, Indonesia's household spending growth was recorded at 4.95 percent (y/y) in Q2-2017, nearly flat from the figure in the first quarter, and below the targeted 5 percent growth line. Recently, Indonesian households have been saving rather than spending (evidenced by rapidly rising third-party funds in the banking sector). Therefore, retail sales have been bleak so far this year in Indonesia and this (partly) explains why Indonesia's economic growth has been rather disappointing so far this year.
Good news is that Indonesia's inflation rate eased to 3.82 percent (y/y) in August. For Indonesian standards this constitutes a low inflation figure and can therefore help to improve consumers' purchasing power. Indonesia experienced 0.07 percent deflation on a monthly basis in August 2017 according to the latest data from Indonesia's Statistics Agency (BPS). Meanwhile, under-control inflation (since 2015) has also helped to push interest rates down in Southeast Asia's largest economy.
Regarding investment realization growth in H2-2017, Sri Mulyani said she sees plenty of difficulties because - based on data from the banking sector - corporate credit growth may slow this year in Indonesia and thus undermines the acceleration of economic growth.
Indonesia's Quarterly GDP Growth 2009-2017 (annual % change):
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Source: Statistics Indonesia (BPS)