After seeing the disappointing GDP growth figure of 4.71 percent (y/y) in the first quarter of 2015, investors have become concerned about Indonesia’s economic growth in the remainder of the year. The poor Q1-2015 GDP growth was caused by the country’s weak export performance (due to the sluggish global economy and low commodity prices), Indonesia’s high interest rate environment (curbing people’s purchasing power and business expansion of local companies), and sluggish government spending.
Although the International Monetary Fund (IMF) maintained its growth estimate of 5.2 percent (y/y) for Indonesia’s full-year economic growth in 2015, Kalpana Kochhar (IMF Deputy Director for the Asia and Pacific Region) said that the poor result in Q1-2015 may cause Indonesia’s economic growth to slip slightly below the IMF’s current growth estimate. Kochhar added that weaker economic growth in China and Japan this year - two key trading partners of Indonesia - will impact negatively on the Indonesian economy. China and Japan, the world’s second and third largest economies, account for about one-fifth of Indonesia’s total non-oil & gas exports. In combination with tightening global financial conditions, a weak rupiah and limited fiscal room for the government to boost the economy through infrastructure investment, this will cause stagnating economic growth of the Indonesian economy.
Currency volatility will remain high as the US Federal Reserve is tightening its monetary approach, while central banks in the Eurozone and Japan are loosening their monetary stances. This context is particularly a problem to those countries where leverage and foreign currency-denominated corporate debt is high, such as Indonesia. According to the latest data from Bank Indonesia, private sector foreign debt rose 14 percent (y/y) in February 2015 to USD $164.1 billion. Previously, Bank Indonesia had repeatedly expressed its concern about a large chunk of this private debt being unhedged.
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Meanwhile, the Indonesian government has limited resources to boost growth (for example through much-needed infrastructure development) as government revenues are limited amid current low commodity prices, while tax revenue collection in the first four months of 2015 - IDR 310 trillion (roughly USD $23.5 billion) - fell short of the government’s target (in fact 1.3 percent below tax collection over the same period last year). The central government targets to see a 30 percent increase in tax collection in 2015, a target that has been described by the World Bank as “unrealistic”.
Global credit rating firm Fitch Ratings said that although there remains some room for the Indonesian government to raise fiscal spending on infrastructure development (while at the same time remaining within the 3 percent of GDP fiscal rule), the government should focus on economic stability rather than seeking higher real GDP growth in order to maintain its investment grade status (which boosts foreign investors’ confidence in the country). Indonesian Finance Minister Bambang Brodjonegoro recently said that the government may let the budget deficit widen to 2.2 percent of GDP in case total revenue generation fails to achieve its target.
Meanwhile, the central bank of Indonesia has limited room to cut its interest rate environment (a move that would boost economic growth) as inflation (6.79 percent y/y in April 2015) and the current account deficit (close to 3 percent of GDP) are still high, while the rupiah is still depreciating ahead of further monetary tightening in the USA. Higher borrowing costs have led to declining credit growth in Southeast Asia’s largest economy. In the first quarter, credit growth averaged around 12 percent (y/y), well below the central bank’s target range of between 15 percent and 17 percent.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Vice President of Indonesia, Jusuf Kalla, expects to see Indonesia’s GDP growth accelerating in the second quarter of 2015 as several government-led infrastructure projects will start. Kalla also advised the central bank to cut interest rates this year in order to facilitate economic acceleration. However, Bank Indonesia Governor Agus Martowardojo told reporters that the central bank remains committed to its tighter monetary policy stance.
Economic Growth Forecasts Indonesia:
|Asian Development Bank||5.5%||6.0%|
|International Monetary Fund||5.2%||5.5%|