Darmin Nasution, the Chief Economics Minister of Indonesia, said economic growth of Indonesia in the first quarter of 2016 may be somewhat curtailed as the (food) harvest season has shifted from March to April and May. The harvest season is important for the economy because it causes a multiplier effect. However, government-led infrastructure investment may still be able to push Indonesia's gross domestic product (GDP) growth higher in Q1-2016 compared with the 5.04 percent (y/y) growth of Q4-2015. Nasution said he expects a Q1-2016 GDP growth rate around 5.1 - 5.2 percent (y/y).
Sasmito Hadi Wibowo, Deputy of Distribution and Services Statistics at the country's statistics agency (BPS), explained that the harvest season always contributes positively to Indonesia's economic expansion because this season encourages a sharp rise in food production and processed food production. This gives consumers more choices in terms of food items in supermarkets as well as the traditional markets. Particularly when retailers offer discounts amid rising competition consumption rises, followed by higher output in the food industry, and thus the economic wheels are in motion. When consumption of food rises, it also impacts positively on other sectors, such as transportation or the packaging industry, hence causing the so-called multiplier effect. However, due to the harvest season's shift from March to April and May, this multiplier effect is expected to be felt in the second quarter, instead of the first one.
Impact of Sluggish Global Economic Growth
The outlook for global economic growth remains filled with uncertainties. Last week, the International Monetary Fund (IMF) announced it had cut its forecast for 2016 global growth from 3.4 percent (y/y) to 3.2 percent (y/y), one of the many downward revisions in its global growth outlook that we saw over the past years. Reasons why the IMF is less positive about global growth include political isolationism (the possible exit of Great Britain from the European Union), growing economic inequality, risks of sharp currency devaluations, geopolitical conflicts, spillovers from China's economic slowdown, the impact of low oil prices on emerging markets, and ongoing weakness in Japan, Europe and the USA.
Meanwhile, the World Bank cut its 2016 forecast for developing East Asia and the Pacific to 6.3 percent (y/y) from 6.4 percent (y/y) previously due to spillover effects from China's economic turmoil, financial market volatility, persistently low commodity prices, and weaker-than-expected economic recoveries in advanced nations.
As the global economic outlook remains subdued (implying that further weakening of Indonesia's export performance is highly likely), the key for an acceleration of Indonesia's economic growth lies domestically, not globally. Besides government spending on infrastructure development (and encouraging the private sector to join investment in this field), the Indonesian government has been releasing a series of economic stimulus packages since September 2015. These policy packages aim at boosting investment through deregulation and fiscal incentives, encouraging the development of the manufacturing sector, encouraging the small and mid-sized companies to engage in export, improve logistics costs, and more (see table below). However, Indonesia has a 'solid' track record in terms of the weak implementation of its own reform policies (for example Indonesia's ceramic manufacturers are still waiting for the lower energy prices that were promised in the third package that was unveiled on 7 October 2015), and therefore it remains uncertain to what extent these packages will manage to push GDP growth higher.
Economic Stimulus Packages of the Indonesian Government:
|• Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
|• Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
|• Cut energy tariffs for labor-intensive industries|
|• Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
|• Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
|• Tax incentives for investment in special economic zones|
|• Waive income tax for workers in the nation's labor-intensive industries
• Free leasehold certificates for street vendors operating in 34 state-owned designated areas
|• Scrap income tax for 21 categories of airplane spare parts
• Incentives for the development of oil refineries by the private sector
• One-map policy to harmonize the utilization of land
|• Single billing system for port services conducted by SOEs
• Integrate National Single Window system with 'inaportnet' system
• Mandatory use of Indonesian rupiah for payments related to transportation activities
• Remove price difference between private commercial and state postal services
|• Removing foreign ownership cap on 35 businesses
• Protecting small & medium enterprises as well as cooperatives
|• Lower tax rate on property acquired by local real estate investment trusts
• Harmonization of customs checks at ports (to curtail dwell time)
• Government subsidizes loans for export-oriented small & medium enterprises
• Roadmap for the pharmaceutical industry
Source: Indonesian Government
Meanwhile, in an effort to boost people's purchasing power and household consumption, the Indonesian government announced it will raise non-taxable income by 50 percent from IDR 36 million (approx. USD $2,727) to IDR 54 million (approx. USD $4,090). Household consumption accounts for about 56 percent of Indonesia's overall economic growth and therefore an improvement in household's purchasing power will have a direct and large impact on economic growth. However, there also exists doubts whether its move to raise non-taxable income will significantly boost household consumption.
All in all, we appreciate that the Indonesian government is aware that the key to higher GDP growth lies onshore, not offshore as the global economic outlook remains subdued. It is particularly important for the country to reduce its dependence on (raw) commodity exports because the era of the commodities boom (that occurred in the 2000s) may never return. The recently unveiled economic packages are therefore a positive sign, so are government efforts to boost purchasing power and Bank Indonesia's successful efforts to stabilize the Indonesian rupiah exchange rate and curtail the current account deficit through a prudent monetary approach.
However, Indonesia is a complicated country due to its large size (and diverse cultural composition) and the massive bureaucratic traditions or way of thinking. This makes the country similar to a large oil tanker; when it changes course it takes a long time to turn around. Moreover, Indonesia is known for its flip-flop policies implying that - during the turn toward a particular direction - the tanker's course can suddenly be set back to the initial direction (implying no reform has taken place) or to another new direction (which increases the total time spent on turning the tanker).
However, we do believe that the government's efforts will be sufficient to push 2016 GDP growth above the 5.0 percent (y/y) mark, up from last year's (six-year low) GDP growth realization of 4.79 percent (y/y).
Indonesia's Quarterly GDP Growth 2009-2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)