FEATURE STORY

Indonesia Economic Quarterly, March 2015: High Expectations

March 18, 2015


After early reform progress in key areas like fuel subsidies, raising expectations, the government now faces challenges to implement further complex reforms amidst more subdued growth prospects

World Bank Group

  • Bold fuel subsidy reform has paved the way for the revised 2015 Budget, the first of the new government, to shift spending allocations decisively towards development priorities, especially capital expenditures, which are budgeted to double compared with the 2014 outturn.
  • Revenues are under pressure. Oil and gas revenues are projected by the World Bank to decline by 57 percent in 2015. This makes a significant increase in total revenues from 2014 levels unlikely, in contrast to the 14.6 percent rise in budgeted revenues.
  • Consequently, government capital expenditure is not likely to rise as much as budgeted, constrained not only by execution challenges but also budget cuts in some areas to meet the de facto fiscal deficit limit of 2.5 percent of GDP. Higher infrastructure spending by state-owned enterprises could provide an additional boost to fixed investment, but the quantity and quality of this spending are uncertain.
  • Indonesia’s economy continues to face pressures from lower global commodity prices and demand, notably including from China, contributing to a moderation in GDP growth to 5.0 percent in 2014. The World Bank expects GDP to accelerate only modestly, to an average of 5.5 percent through 2016, led by a pick-up in fixed investment growth, helped by rising infrastructure spending (albeit short of targeted levels). Exports are expected to stage a slow recovery but, with investment also pushing up imports, net exports are not expected in the base case to be a major growth driver.
  • A considerable portion of the growth slowdown since 2012 can be attributed to a reduction in the potential growth rate to an estimated 5.5 percent or less, not just a cyclical dip in growth, due in part to lower commodity prices. This edition of the IEQ examines the role of Indonesia’s natural resource sector over the commodity boom period, and assesses the more challenging outlook. For Indonesia’s natural wealth to play a stronger role in development, progress on sound policy and regulatory frameworks for, and effective public management of, the natural resources sector will be critical.
  • The current account deficit  is expected to remain close to 3.0 percent of GDP on average, due to structural factors, sluggish exports, and some pick-up in imports associated with stronger investment. The sharp reduction in global oil prices since mid-2014 is reducing the trade deficit, but lower net oil imports are expected to be offset increasingly by lower natural gas export revenues.
  • Rice prices spiked in February, highlighting structural issues in Indonesia’s rice market, the management of which creates distortions and is hampered by a lack of timely, accurate data. The wider headline CPI index has fallen, due mainly to lower retail fuel prices since January, though core inflation has been sticky, at 5.0 percent year-on-year.
  • Like the currencies of most other emerging market economies, the Rupiah has depreciated significantly against the US Dollar, but since mid-2014 has appreciated in real trade-weighted terms. The new fuel pricing system reduces direct fiscal risks from further US Dollar strength, so long as it is consistently implemented.
  • The government’s ambitious reform agenda has scored some important early successes and raised expectations. Sustainably accelerating growth and poverty reduction will now require a focus on implementation. For example, the government is prioritizing streamlining procedures for business licensing, and has established strong initial momentum, but making the reform operational faces complex challenges. 



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