The FINANCIAL — Strong investment and exports in Southeast Asia’s largest economy supported a healthy pace of growth in the first half of 2017, with growth momentum expected to continue to build this year and the next, says a new report by the Asian Development Bank (ADB) released on September 26.
In an update of its flagship annual economic publication, Asian Development Outlook (ADO) 2017, ADB maintained its gross domestic product (GDP) growth forecast for Indonesia at 5.1% for this year and 5.3% for next year, in line with ADB’s earlier forecasts in April. GDP grew above 5% in the first 6 months of the year, driven by buoyant fixed investment and net exports.
“Indonesia’s economy remains resilient amid global uncertainties, with growth poised to come in at a healthy pace this year,” said Winfried Wicklein, ADB Country Director for Indonesia. “With higher allocations for public infrastructure and the gradually improving climate for private investment, we are likely to see further economic expansion in the coming year.”
The Update notes that government consumption is expected to boost growth in the second half of 2017. Meanwhile, private investment is expected to expand gradually over the forecast period, as it benefits from policy reform to improve the business environment. Standard & Poor’s recent upgrade of Indonesia’s sovereign rating to investment grade should accelerate capital inflows, including foreign direct investment.
Credit growth should improve gradually following the recent Bank Indonesia rate cuts and additional measures to allow banks more flexibility to manage liquidity. Fiscal policy continues to be growth supportive. The revised budget foresees total expenditures somewhat higher, notably with higher allocations for public infrastructure, healthcare, and education.
In spite of the rollback of the government’s energy subsidy, which saw electricity prices increase, private consumption remained robust, the Update notes. Consumer confidence is seen to hold up well, benefitting from a stable rupiah and expectations of tamer inflation, with headline inflation expected to decline to an average of 4% in 2017 and 3.7% in 2018. Underpinning this downward trend are fresh efforts to restrain food prices by better managing logistics and regional food distribution centers.
Indonesia’s trade prospects remain mixed, with recovery and growth among its trading partners uneven and downward pressure on commodity prices, the Update says. Imports are still expected to grow more slowly than exports in the second half of this year. The Update maintains its forecast for a current account deficit equal to 1.7% of GDP this year, but expects it to widen to 2% in 2018, as imports are expected to outpace exports to supply several large public investment projects. Capital inflows are expected to be more than sufficient to finance the current account deficit, thus adding to foreign exchange reserves.
“Risks to the outlook stem from progress in government tax revenue mobilization, global commodity prices, and policy uncertainty in advanced economies,” said Mr. Wicklein. “These risks underscore the need for Indonesia to maintain a flexible exchange rate and open trade and capital accounts, alongside accelerating structural reform to further strengthen the economy.”