Indonesia Economic Quarterly, March 2016: Private Investment is Essential

March 15, 2016

  • Weak global growth in 2015 has affected Indonesia, with the country growing only by 4.8% last year. Indonesia’s 2015 growth was respectable for a commodity exporting country, but was not enough to absorb the 3 million youth entering the work-force, and reverse the recent trend of slower poverty reduction.
  • To boost growth, Indonesia has to rely on fiscal expansion in the short term, while simultaneously introducing reforms to facilitate investment and reduce the cost of doing business in the medium term.
  • The World Bank projects 5.1% GDP growth for 2016, and 5.3% for 2017. This is a downward revision by 0.2 percentage points relative to December’s forecast, due to weaker than expected external conditions, and subdued revenue growth, which may constrain the government’s plans to increase spending.
  • The reduction of fuel subsidies, which accounted for 20% of central government spending in 2014, created the fiscal space for the significant rise in public investment – central government investment increased by 42% percent year on year in 2015 – supporting the economy.
  • However, revenues are likely to be weaker than targeted in the 2016 Budget, owing largely to lower than expected global oil and gas prices. Maintaining capital spending will require a higher fiscal deficit of 2.8% of GDP and cuts in non-priority expenditures.  
  • This fiscal expansion alone may not raise growth above 5%. That will depend on an improvement in private sector activity, in particular investment.
  • Private consumption growth remained moderate in the last quarter of 2015, while export revenues from commodities and manufacturing continued to decline.
  • Indonesia’s recovery will depend on policies to improve the business climate, attract higher private investment, and diversify the economy.
  • Other issues discussed in this edition include: Indonesia’s logistics sector reforms, which are essential both for the development of remote regions and for economic diversification; the country’s transition to a more sustainable energy path which can be supported by aligning pricing, regulation and investment policies; and, finally, rising public support for policy action to reverse the recent trend of slower poverty reduction and rising inequality.