October 2015 Indonesia Economic Quarterly: In Times of Global Volatility

October 22, 2015

  • Heightened global uncertainty has made macroeconomic management more challenging and downside risks to the near-term outlook more pronounced.
  • The baseline projection for Indonesia’s 2015 GDP growth remains at 4.7%. Growth is expected to pick up to 5.3% in 2016, reflecting gradually improving external conditions and higher public investment spending.
  • The country’s growth outlook is subject to considerable risks which include the normalization of US interest rates, continued slowdown in key trading partners, including China, a weakened corporate sector due to currency depreciation and declining profit margins.
  • The government recognizes the need to improve business confidence and the investment climate in order to enhance growth and has taken several important steps in this direction. In September and October, the government announced a series of reform packages that focus on reducing the regulatory burden and decreasing the costs of doing business.
  • The government is also improving public spending. Accelerating in the third quarter, capital spending is estimated to have increased by 21.4 percent in real terms in the first nine months of 2015, compared to the same period in 2014. This spending is expected to support fixed investment and growth.
  • Fixed investment has been the main driver of the economic slowdown, although private consumption has also moderated, contributing to the moderate pace of GDP growth, at 4.7 percent year-on-year, in the second quarter.
  • Domestic demand moderation and weak imports have reduced the current account deficit by half compared with its year-ago level. At the same time, the financial account balance declined considerably, as financing conditions for all emerging markets have tightened since June.
  • The drought caused by the El Niño weather pattern also poses risks. More severe El Niño conditions may increase rice prices by up to 10 percent for the year and CPI inflation by at least 0.3 to 0.6 percentage points. Poor households spend a larger share of their income on food and may be impacted more by higher prices.
  • This IEQ edition also discusses Indonesia’s national health insurance program and the challenges it faces to achieve universal access to healthcare and to support its broader social and economic goals.
  • The report also looks into housing affordability. There is strong political momentum to increase the supply of affordable housing, but spending in the sector needs to be more equitable and effective.