Indonesia’s Growth to Recover as Public Investment Increases

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The FINANCIAL — Indonesia’s economic growth is expected to pick up next year, buoyed by rising public investment and continued economic reforms, says a new report by the Asian Development Bank (ADB) released on September 22.

In an update of its flagship annual economic publication, Asian Development Outlook 2015, ADB forecasts Indonesia’s gross domestic product (GDP) 2016 growth of 5.4%, trimmed from 6.0% in March but an improvement on the 4.9% growth expected this year. In March, ADB forecast 2015 growth of 5.5%.

“Delay in economic recovery is primarily due to weaker-than-anticipated external demand and financial market volatility,” said Steven Tabor, ADB Country Director for Indonesia. “The impact of accelerated emphasis on deregulation, stronger infrastructure investment, and export recovery triggered in part by devaluation are likely to spur economic expansion in the coming year.”  

A key driver of the expected growth is stronger public spending, which has been delayed largely by slow fund disbursement. The government has taken measures to improve budget execution, which include efforts to simplify land acquisition procedures, and advancing to 2015 the tendering process for procurement of most public projects under the 2016 budget to expedite implementation.

Policy reforms are expected to stimulate private investment. Reforms include a new one-stop service for investment licensing and encouraging private investment in selected infrastructure projects through public-private partnership. Earlier this month, the government unveiled a package to revive investment that further simplifies or removes regulations that hinder business, expand tax incentives, accelerates strategic projects, and allows foreign ownership of high-end properties.

Meanwhile, household consumption is expected to remain fairly robust. A pay rise for civil servants and tax breaks for low-income earners will foster consumer spending. Weakened consumer confidence earlier this year—due to cuts to fuel subsidies and a depreciation of the currency—has since stabilized. Another factor cited by the ADB report is the expected easing of inflation towards the end of the year.  

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“There is a risk to this growth prospect coming from global financial market turbulence, but the country’s resilience against market volatility has improved, partly due to a more flexible exchange rate and market-driven adjustment to bond yields,” said Edimon Ginting, ADB Deputy Country Director for Indonesia. He said the government was well placed to manage risks including  delays in infrastructure investment, slow progress on structural reforms, and potentially severe impact of El Niño weather conditions.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region, including Indonesia. In 2014, ADB assistance totaled $22.9 billion, which includes cofinancing of $9.2 billion.

 

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