June 2017 Indonesia Economic Quarterly: Upgraded

Report key findings:

  • A supportive global environment, coupled with sound domestic fundamentals, has enabled the Indonesian economy to begin 2017 on a strong footing. Fiscal management and credibility has improved, as attested by the recent Standard and Poor’s (S&P) credit rating upgrade.
  • Quarterly GDP growth rose from 4.9 percent in the last quarter of 2016 to 5.0 percent in the first quarter of 2017, lifted by a rebound in government consumption and surging exports.
  • Private consumption growth has been robust, supported by a stable Rupiah and muted inflation. Investment growth continues to be strong on the back of the ongoing recovery in commodity prices, continued reforms to improve the business environment, lower financing rates, and better business sentiment.
  • Electricity price hikes in 2017 for 900 VA users have contributed to an increase in inflation to 3.9 percent for the first five months of the year. The effects of higher energy costs have been partially offset by lower food inflation. This year’s inflation is expected to average 4.3 percent, remaining within Bank Indonesia’s inflation target band.
  • Indonesia’s current account deficit continues to be narrow at 1.0 percent of GDP, supported by exports that increased faster than imports, coupled with the ongoing positive terms-of-trade shock. For 2017 as a whole, the current account deficit is expected to be unchanged from 2016 at 1.8 percent of GDP.
  • Fiscal policy in 2017 has made a strong start, with improved revenue performance and quality of expenditure, supporting economic growth. End of May budget outturns show a smaller fiscal deficit relative to the same period last year. The fiscal deficit for 2017 is expected to be at 2.6 percent of GDP.
  • Economic outlook is positive due to a supportive global economy and strong domestic fundamentals. Indonesia’s real GDP growth is projected to increase from 5.0 percent in 2016 to 5.2 percent this year, and further strengthen to 5.3 percent in 2018.
  • Although they have subsided in recent months, global policy uncertainty and the threat of increased international protectionism continues to pose substantial downside risks to the nascent recovery in global trade.
  • Indonesia’s foreign direct investment (FDI) has grown over the last 15 years, but still represents a lower share of GDP compared to other countries in the region. This edition of the IEQ discusses the need to re-evaluate FDI restrictions, particularly those in the negative investment list, to encourage more FDI inflows.
  • The report also has a discussion on the importance of increasing investment in early childhood development. Better integration on multi-sectoral early childhood development programs can lead to more optimal results.