The government of Indonesia is convinced that its new economic growth target can be achieved as it has initiated several development programs to spur growth (the fruits of which are to be felt in the second half of the year). These programs include government-led infrastructure development and efforts to enhance the quality of the country’s investment climate. Furthermore, Bank Indonesia implemented several measures to boost domestic demand (lowering down payments for car, motorcycle and property sales).

Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):

 Year    Quarter I
   Quarter II    Quarter III    Quarter IV
 2015        4.71
 2014        5.14        5.03         4.92         5.01
 2013        6.03        5.81         5.62         5.72
 2012        6.29        6.36         6.17         6.11
 2011        6.45        6.52         6.49         6.50
 2010        5.99        6.29         5.81         6.81
 2009        4.60         4.37         4.31         4.58

Source: Statistics Indonesia (BPS)

Indonesia’s central bank (Bank Indonesia) refrained from cutting its interest rate environment as the country is currently being plagued by high inflation (7.26 percent y/y in June 2015), a wide current account deficit, and a weak rupiah. A relatively high interest rate regime is also a strategy to avert severe capital outflows in case the US Federal Reserve decides to raise its key Fed Fund Rate.

Indonesia’s economic slowdown in combination with high interest rates have caused slowing loan demand. Bank Indonesia Governor Agus Martowardojo said on Friday (03/07) that Indonesia’s credit growth may not reach the target range of 15 to 17 percent, but is more likely to reach 11 to 13 percent in full-2015. In the first five months of 2015, Indonesian lenders only disbursed a total of IDR 3,792.8 trillion (approx. USD $285 billion), a 10.3 percentage point growth from the same period last year.

Martowardojo hopes to see improved credit growth in the second half of the year. Improved performance is possible as the government is expected to commence disbursing funds for its infrastructure projects in the second half of 2015. In the Revised 2015 State Budget, the government allocated USD $21 billion for infrastructure spending (for example roads, bridges, airports, power plants and seaports). However, in the first six months of the year only 8 percent of these funds were spent. This poor performance is mainly due to severe bureaucracy (including difficulties of land acquisition) leading to the delay of projects.

Meanwhile, a recent Reuters poll concludes that Indonesia’s rupiah is one of the most vulnerable currencies in case the Federal Reserve raises US interest rates because Indonesia has large amounts of US dollar-denominated debt and is plagued by slowing economic growth (a process that started in 2011). Analysts expect the rupiah to weaken to IDR 13,800 per US dollar over the coming year. This year so far, Indonesia’s currency has already depreciated over 7 percent against the greenback.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.16 percent to IDR 13,316 per US dollar on Friday (03/07).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia