Indonesia's gross domestic product (GDP) expanded 5.02 percent year-on-year (y/y) in full-year 2016. Although the figure is higher compared to the revised 4.88 percent (y/y) growth pace that was recorded in the preceding year (hence effectively ending the nation's economic slowdown that occurred in the years 2011-2015), the slow pace of acceleration may disappoint part of the investor and analyst communities.
Earlier we reported that a GDP growth pace below 5.0 percent (y/y) would be regarded a disappointing performance of the Indonesian economy in full-year 2016, while a pace above 5.1 percent (y/y) would be a considered a good performance. With Indonesia's official full-year 2016 GDP growth realization falling in between these two qualifiers, it leads to a mixed picture: not good, and yet, not bad. Meanwhile, the government's revised target was achieved. Although the government initially set a 5.2 percent (y/y) growth target for 2016 it revised down the target to 5.0 percent (y/y) near the year-end.
However, despite six interest rate cuts in 2016, conducted by the central bank Bank Indonesia) amid easing inflation and a stable rupiah, economic growth of Southeast Asia's largest economy still managed to undershoot. This is attributed to low commodity prices (Indonesia being a key commodity exporter and therefore GDP growth accelerated strongly during the 2000s commodities boom) and China's economic slowdown (China is a key trading partner of Indonesia).
Indonesia's per capita GDP showed a strong improvement in 2016. This is a positive development as it should strengthen people's purchasing power and therefore should lead to rising consumption (although it needs to be emphasized that there exists a high degree of inequality in terms of income distribution in Indonesia).
Indonesia's GDP per Capita 2014-2016:
|GDP per Capita at Current Price
(in million rupiah)
(in US dollar)
Source: Statistics Indonesia (BPS)
What is worrying is that Indonesia's GDP growth in the fourth quarter of 2016 slowed to 4.94 percent (y/y), from a growth pace of 5.01 percent (y/y) in the third quarter of 2016. This is partly explained by cooled household consumption. If we take a look at the table below, we see that Indonesia's GDP growth traditionally accelerates from the third quarter to the fourth quarter. This tradition exists because the Indonesian government usually speeds up public spending at the year-end. Therefore, slowing economic growth in Q4-2016 (on a quarterly basis) could be sign that public spending has been more even this year and therefore did not cause a big boost at the year-end. Overall (full-year 2016) the Indonesian government spent 223.4 trillion (approx. USD $16.8 billion) less than it planned, implying there are some missed opportunities here (although the government had to be careful not to widen the budget deficit too much).
However, Indonesia's weaker-than-estimated growth in Q4-2016 could also be caused by the severe global and domestic uncertainties that emerged in November 2016. The surprise victory of Donald Trump in the 2016 US presidential election caused significant capital outflows from Indonesia in the last quarter. These uncertainties still linger on as Trump's trade and immigration policies are controversial. Meanwhile, ethnic and religious tensions were high in Indonesia in the last quarter of 2016 (and still are today as we approach the local Jakarta election) due to the blasphemy case of Jakarta Governor Ahok. In November 2016 a massive demonstration was staged by hardline Muslims, who demanded the arrest of the Jakarta Governor.
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
In terms of geography, the island of Java continues to dominate the Indonesian economy. In full-year 2016 Java accounted for 58.49 percent of Indonesia's total economic growth, followed by Sumatra (22.03 percent), and Kalimantan (7.85). This implies that the islands Java and Sumatra, together, contribute more than 80 percent to the nation's total economic growth.
Some analysts have turned rather negative toward the outlook for economic growth in Indonesia in the years ahead because commodity prices are likely to remain relatively low in the foreseeable future, while Bank Indonesia cannot cut its interest rate environment further (considering inflation is likely to rise in the 12 months ahead) and Indonesian policymakers are also running out of scope to stimulate the economy further. Therefore, some analysts see Indonesia's economic growth rate stuck around 5 percent (y/y) over the next couple of years.