March 2017 Indonesia Economic Quarterly: Staying the Course

Report key findings:

  • Economic growth increased for the first time in five years, rising up to 5.0 percent in 2016 from a revised 4.9 percent in 2015, despite heightened global policy uncertainty. A stable Rupiah, record low inflation, declining unemployment and soaring real wages lifted consumer confidence and private consumption. In contrast, falling government expenditure and weaker investment growth weighed on overall economic growth for the year.
  • The fundamentals of the Indonesian economy remain strong, with a robust rate of economic growth, the current account deficit and unemployment at multi-year lows, a conservative fiscal deficit and inflation at a record low.  Poverty and inequality also decreased in 2016.
  • Fiscal policy credibility was enhanced by cuts in government expenditure, along with the more achievable revenue targets in the 2017 Budget, which bolstered investor confidence.  The fiscal deficit in 2016 was 2.5 percent of GDP, lower than expected from 2.6 percent in 2015.
  • The current account deficit is down to a five-year low of 0.8 percent of GDP in Q4 2016, mostly due to stronger manufacturing exports. For 2016 as a whole, the current account balance narrowed to 1.8 percent, also a five-year low, from 2.0 percent in 2015.
  • Real GDP growth is forecast to rise to 5.2 percent in 2017, and reach 5.3 percent in 2018. Household consumption growth is projected to gain with a stable Rupiah, higher real wages and continued low unemployment.  Private investment growth is poised to increase as commodity prices recover, and the effects of monetary easing in 2016 and recent economic reforms gain traction.  Higher commodity prices will also ease fiscal constraints and lift government spending, while stronger global growth carries exports.
  • Inflation is expected to temporarily rise from 3.5 percent in 2016 to 4.3 percent in 2017 due to hikes in electricity tariffs and vehicle registration fees.
  • Risks to the growth forecast include unexpected changes in the U.S. monetary policy, political uncertainty in Europe, higher than expected domestic inflation and weak fiscal revenues.
  • The report includes a study on services trade in Indonesia. It proposes a reduction in Indonesia’s restrictions on services trade to improve productivity and competitiveness. According to OECD data, Indonesia has some of the most restrictive barriers to services trade.   Trade restrictions on services weaken the quality of those services and also impede the productivity of other sectors of the economy. Lifting these restrictions could therefore bring economy wide benefits
  • The March 2017 IEQ report also finds that the redesign of the Kredit Usaha Rakyat (KUR) program towards the provision of subsidized loans to micro, medium and small enterprises (MSMEs), has led to a ten-fold increase in the cost of the program. With more selective targeting, program costs could be much lower, and the savings could be redirected to other underfunded priority sectors in Indonesia.  There is a strong need to reconsider the use of subsidized loans to support MSMEs.