First signs of pickup in growth?
GDP growth is set to level off in 2016 after five years of deceleration. The economy is forecast to expand by +5% this year after +4.8% in 2015. Domestic demand is on the rise, supported by strong fiscal spending and higher private consumption.
Exports still struggle but as commodity prices edge up, one can see first signs of improvement. Private investment crawls upward but improved economic conditions suggest a gradual increase.
Domestic credit conditions have eased thanks to lower interest rates. Moreover, streamlined regulations for foreign investors, an under control current account deficit, and better demand prospects should translate into a gradual increase in foreign inflows. Risks include yet another drop in commodity prices, lower external demand growth, and tighter global financing conditions.
Adequate policies enhance the economic outlook
The deficit is set to widen in the short run. Reasons include government increases in expenditures to support economic growth and lower commodity prices which translate into lower fiscal revenues. Yet alarm bells should not sound for the time being. Relatively low levels of debt and deficit are supported by a tough fiscal framework which limits government deficit to -3% GDP and public debt to 60% GDP.
The monetary policy is flexible and appropriate. A tight approach in 2015 helped the economy to (i) navigate through external turbulences (lower commodity prices, Fed tightening) and (ii) reduce inflationary pressures. In H1 2016, a combination of lower inflation and a slight improvement in external conditions allowed the Central Bank to ease its monetary policy. Looking ahead, a cautious easing stance will probably be maintained to support economic growth.
The country’s business environment is significantly improving. Indonesia is now ranked 109th (up from 120th) in the World Bank’s Doing Business 2016 survey. It ranks better on Paying taxes, Dealing Construction and Getting credit sub-components.
External position is improving
External pressures on the currency have abated thanks to the cautious monetary stance. The external debt to GDP ratio and the import cover ratio (above 6 months) are at acceptable levels. Furthermore, the current account balance has improved and stabilized above -3% GDP. Lower exports were compensated by lower imports.