There is plenty of room for optimism about the direction of Indonesia's economic growth this year. Indonesia's Statistics Agency (BPS) announced on Friday (05/08) that the economy of Southeast Asia's largest economy expanded by 5.18 percent (y/y) in the second quarter of 2016, a figure that exceeded all expectations and forms a remarkable jump from the 4.66 percent (y/y) GDP growth figure in Q2-2015 and 4.91 percent (y/y) in Q1-2016. As a result, Indonesia's benchmark Jakarta Composite Index is currently near record levels.
The 5.18 percent (y/y) growth in Q2-2016 was the strongest growth over the past 10 quarters and this is a great victory for the nation that is combating a multi-year economic slowdown. Since 2011, the Indonesian economy has been experiencing an economic slowdown on the back of low commodity prices, weak global economic growth and Indonesia's high interest rates (which curtails Indonesians' purchasing power). The reasons why Bank Indonesia had to implement higher interest rates in 2013-2015 (thus stepping on the brakes of economic growth) were high inflation (after the Indonesian government reformed its energy subsidy policies), a wide current account deficit and a sharply weakening rupiah (due to monetary tightening in the USA).
Indonesia's economic growth in the second quarter of the year was primarily supported by improving household consumption (growing by 5.04 percent y/y in Q2-2016 from 4.94 percent y/y in the preceding quarter), rising government spending (growing 6.28 percent y/y from 2.94 percent y/y in the preceding quarter), and consumption by non-profit institutions serving households that expanded by 6.72 percent (y/y) in Q2-2016 from 6.40 percent (y/y) in the preceding quarter.
Indonesian Chief Economics Minister Darmin Nasution stated that the positive GDP growth result in Q2-2016 is heavily influenced by the shifting harvest season. However, this does not mean that the Q2-2016 GDP growth result should be regarded an incident that will be followed by a slowdown in the remainder of the year. In fact, various data show positive signs (improving household consumption, government spending and even improving export-import figures - although still contracting) that should support economic acceleration in the remainder of the year. Nasution estimates that the economy of Indonesia will grow by an average of 5.2 percent (y/y) in full-year 2016. Key to achieve this growth pace is public investment in infrastructure development, Nasution added, as this will cause a multiplier effect within the economy. Possibly, Indonesia's tax amnesty program will also cause the inflow of a significant amount of capital into Indonesia (in additional state revenue or directly in financial markets due to the repatriation of funds) that can boost the nation's economic growth in the next three quarters.
Meanwhile, Java remains the largest contributor to overall economic growth in Indonesia. The island of Java accounts for 58.8 percent of total gross domestic product, followed by Sumatra (22.0 percent) and Kalimantan (7.61 percent).
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)
Suryamin, Head of BPS, stated that household consumption in Indonesia in the first quarter of the year was supported by the disbursement of additional monthly salaries due to Islamic festivities. In Indonesia employees are paid a 13th-month salary, typically just before the Idul Fitri holiday (4 - 8 July 2016). Although this salary was paid in late June or early July, households already started to spend funds in anticipation of the 13th-month salary.
Regarding Indonesia's GDP growth in Q2-2016 there are a couple of less rosy remarks that need to be made:
(1) Although nearly all of the economy's sectors expanded, this expansion was not inclusive, implying that it failed to create employment opportunities for all segments of the population (thus failing to distribute the dividends of increased prosperity). Expansion of the agriculture, forestry and fishery sector (which contributes up to 37.7 million jobs to the Indonesian economy) was recorded at 3.23 percent (y/y) in Q2-2016. Meanwhile, another relatively labor-intensive sector that also grew below the national average of 5.18 percent (y/y) was the manufacturing industry at 4.74 percent (y/y).
(2) Private sector investment in Indonesia as well as the nation's export-import figures remain bleak, improving only slightly in Q2-2016. Export-import figures are still contracting although at a lower pace compared to the preceding quarter. Meanwhile, private sector investment needs to be raised in order to create more stable and inclusive economic growth. The government should therefore continue to implement economic policy packages that aim at attracting (foreign and domestic) direct investment.
(3) There exist fiscal risks. Economic growth of Indonesia is currently highly supported by government investment. However, the budget deficit has been rising as tax revenues are much weaker-than-targeted. In case tax income remains weak and the tax amnesty program will not be enough to plug the deficit, then the government may need to cut its spending programs further. Its infrastructure budget could be a victim.
Indonesian Economy (annual % change):
|Gross Domestic Fixed Capital Formation||5.06%||5.57%|
|Change in Inventories||-||-|
|Export of Goods & Services||-2.73%||-3.53%|
|Minus Import of Goods & Services||-3.01%||-5.08%|
|Gross Domestic Product (GDP)||5.18%||4.91%|
Source: Statistics Indonesia (BPS)
Poll Indonesia Investments:
Where do you see Indonesia's economic growth in full-year 2016?
Voting possible: -
- Between 5.0% - 5.2% (55%)
- Between 5.2% - 5.4% (19%)
- Below 5.0% (15.5%)
- More than 5.4% (10.5%)
Total amount of votes: 611