US-based Goldman Sachs, a global investment banking, securities and investment management firm, downgraded its 2015 outlook for Indonesia from 5.3 percent (y/y) to 4.9 percent (y/y). Another US-based and global banking institution, JPMorgan Chase, is the most pessimistic one among the four aforementioned institutions, slashing its forecast for economic growth of Indonesia in 2015 from 5.3 percent (y/y) to 4.4 percent (y/y).

Switzerland-based Credit Suisse, a multinational financial services firm, revised down its outlook for Indonesian GDP growth from 5.1 percent (y/y) to 4.8 percent (y/y). Lastly, Nomura Holdings, a Japanese financial holding company and member of the Nomura Group, slashed its outlook from 5.2 percent (y/y) to 4.8 percent (y/y).

Slowing economic growth, a process that has been experienced by Indonesia since 2011, is caused by global and domestic factors. Two key global factors that are at play are (1) sluggish global economic growth, particularly slowing growth in China (a key trading partner of Indonesia) led to falling commodity prices, and (2) looming monetary tightening in the USA which leads to capital outflows and severe rupiah depreciation (causing imported inflation and limited purchasing power).

Domestically, the high interest rate environment (with the key BI rate at 7.50 percent) has undermined people’s purchasing power and resulted in reduced domestic consumption. Slowing car and motorcycle sales, as well as slowing cement sales inform us that Indonesian consumers have become more cautious this year, while slowing cement sales tell us that activities of property and construction firms have slowed. The high interest rate environment set by Bank Indonesia is not expected to be cut anytime soon as the institution is committed to higher rates in an effort to combat high inflation, curb the wide current account deficit and limit capital outflows ahead of further monetary tightening in the USA.

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)

Meanwhile, highly-anticipated government-led infrastructure spending (one of Joko Widodo’s pledges during his presidential campaign in 2014) has not been realized yet. After largely scrapping fuel subsidies in January 2015, the government assembled additional funds to spend on infrastructure development. However, it still required approval from Indonesia’s House of Representatives (DPR). In February 2015, the Revised 2015 State Budget was approved by this House, paving the way for government-led infrastructure development.

However, this delay in infrastructure development in combination with continued economic slowing has resulted in reduced confidence in Joko Widodo’s ability to guide the nation to accelerated growth of over 7 percent (y/y) by 2019 (another pledge in his presidential campaign). Moreover, the government has set several targets that are highly unrealistic according to most domestic and international analysts. For example, the government targets economic growth of 5.7 percent (y/y) in 2015 and economic growth in the range of 5.8-6.2 percent (y/y) next year. It also targets tax revenue growth of about 30 percent in 2015. However, given the country’s low tax compliance, the government’s weak financial management and monitoring, the low number of tax officials, and the economic slowdown this target is highly unrealistic. In the January-April 2015 period, the government collected IDR 310.1 trillion in taxes, equivalent to only 24 percent of its full-year 2015 target and slightly down from tax collection in the same period last year.

Earlier, the World Bank had already revised down its economic growth forecast for Indonesia in 2015 from 5.6 percent (y/y) to 5.2 percent (y/y). Main reasons for this downgrade are that Indonesia’s export performance remains weak, while domestic consumption is curtailed by high interest rates.