The Indonesian economy continued to grow at a solid pace in Q3-2017, supported by rising commodity prices as well as stronger domestic and global demand. Indonesia's real gross domestic product (GDP) growth accelerated from 5.0 percent year-on-year (y/y) in Q2-2017 to 5.1 percent (y/y) in the following quarter. Investment growth rose to its highest level in over four years, while foreign direct investment (FDI) recorded the largest net inflow in over seven years. Meanwhile, export and import volumes registered double-digit growth for the first time since 2012.

Rodrigo A. Chaves, World Bank Country Director in Indonesia, added that the better business environment helps to attract a rising amount of FDI as well as more public capital investment, which is made possible by the fuel subsidy reduction two years ago. Hence, pushing for reforms makes a true difference and therefore more reforms should be implemented, aimed specifically at increasing tax collections and continuing to rationalize subsidies to accelerate infrastructure and human capital development.

Meanwhile, the World Bank sees signs that household consumption (which has been bleak in recent years but still contributes about 55 percent to Indonesian GDP) has started to recover, reflected by rising sales of consumer durables, such as cars and motorcycles (in fact motorcycle sales jumped by a double-digit figure in the third quarter after three years of consecutive contractions).

Hence, the World Bank expects the Indonesian economy to accelerate to a growth rate of 5.1 percent (y/y) in 2017 (up modestly from 5.02 percent in the preceding year) and accelerate further to 5.3 percent (y/y) in 2018 on the back of continued strong investment growth, further recovery in consumption, and an increase in government spending.

However, there are risks lurking about that could impact on Indonesian economic growth. For example, volatility in global financial markets, and slower-than-estimated private consumption growth.

Meanwhile, inflation has become very low (for Indonesian standards) at 3.30 percent (y/y) in November 2017 due to subdued food prices and the absence of further planned energy price hikes this year. The World Bank expects the figure to rise slightly in the last month of 2017, before easing again in 2018.

The improvement in global trade also impacts positively on Indonesia's current account deficit, which is expected to narrow to 1.6 percent of GDP in 2017. However, as terms-of-trade decline in 2018 while investment remains robust, the current account deficit of Indonesia is expected to widen modestly to 1.8 percent of GDP.

The fiscal deficit target (at 2.2 percent of GDP) in the 2018 State Budget is lower than in previous years, providing increased fiscal space in the short term. In line with the stronger macroeconomic outlook for 2018 and ongoing tax policy and administration reforms, the World Bank also projects a fiscal deficit of 2.2 percent of GDP.

Read the full World Bank Report