Indonesia

Solid growth underpinned by better fundamentals

Country Rating B1

Strengths

  • Favorable demographics: large and young population as well as growing middle class
  • Abundant natural resources
  • Resilient banking system owing to relatively high capital adequacy ratio and low level of NPLs
  • Solid public finances and sound fiscal policies

Weaknesses

  • Corruption, lack of transparency, and weak legal system
  • Inefficient tax administration and strong informal economy
  • Growth dependent on raw commodity exports, especially to the slowing Chinese economy 
  • Serious infrastructure gap compared to regional peers 
  • Increasing inequality poses a threat to social cohesion and inclusive economic growth  

Economic Overview

 

Gradual acceleration


After reaching a low point in 2015 (+4.9% GDP growth), the economy bounced back supported by strong domestic demand growth. Looking ahead, EH expects +5.1% growth in 2017 and +5.2% in 2018.
 
The outlook for exports is improved by higher demand from major economies, and a gradual recovery of commodity prices. Macro-policies are becoming more supportive as key structural imbalances, namely a large current account deficit and a high level of inflation, have been reduced.
 
Improved business sentiment, favourable credit conditions and rising new exports orders suggest a gradual rise in investment. Private consumption growth is set to remain firm. It is supported by a dynamic labor market and a combination of high wages growth and moderate inflation.

Macropolicies: more supportive


Government debt is low (below 30% of GDP) and deficit is under control. Against this backdrop, the authorities plan to boost economic growth through an increase of public investment in infrastructure.
 
Fiscal policy will continue to be expansionary until 2018 at least. Yet the fiscal deficit should remain below the target of -3.0% of GDP.
 
Monetary policy is accommodative. The central bank has embarked on an easing cycle since late 2015 in order to boost economic growth. Policy rate decreased by 1pp to 4.5% between April 2016 and August 2017. Looking ahead, the authorities will likely maintain their easing stance given the low rate of inflation and rupiah stability.

​Improving business environment


The reforms initiated by the current administration to improve the business environment such as a deregulation package, and a tax amnesty program are starting to bear fruit. Indonesia’s rank in the World Bank Doing Business 2017 survey improved from 106 to 91 (out of 190 countries). There was significant progress on tax and credit sub-components. The current government strategy is to open the country to foreign investment, with lower restrictions on sectors that were previously heavily protected (tourism, transportations and retail, e.g.).

 

Solid external position and stable currency


External debt has decreased from 36.0% in 2015 to an estimated 32.0% of GDP in 2017. Foreign exchange reserves are a comfortable level, covering more than 7 months of imports of goods and services.
 
The current account deficit is set to narrow further owing to improving terms of trade, and improving global demand. Coupled with higher inflows of portfolio investment and FDI, Indonesia’s favourable balance-of-payments position will help to keep the rupiah in check.