Indonesia:Year in Review 2017

Solid growth, supported by strong investment flows, should put Indonesia on a firm footing in 2018, despite a slight drop in expectations.

In mid-November 2017 Bank Indonesia (BI) sharpened its forecast for year-end growth to 5.1 per cent, at the lower end of projections made earlier in 2017 of between 5 per cent and 5.4 per cent.

The revision came after thirdquarter growth reached 5.06 per cent year-on-year (y-o-y), up from 5.01 per cent in the two previous quarters, but below market expectations.

In a move that could help bolster growth in early 2018, BI also maintained all of its key rates in November for a second consecutive month, namely the seven- day reverse repo rate, which was held at 4.25 per cent, the deposit facility rate (3.5 per cent) and lending facility rate (5 per cent). Its decision came after the lender implemented total cuts of 0.5 per cent in August and September. Consumption sluggish despite rate cuts

However, despite eight rate cuts since the start of 2016, consumption has remained subdued, with many Indonesians opting to save rather than spend.

Growth in the retail sector slowed towards the end of the year, with BI’s real sales index (RSI) slipping to 1.8 per cent y-o-y in September compared to 2.2 per cent in August.

Sales in September were also down y-o-y, with the growth rate of both food and non-food sales dipping 0.3 per cent to 7.6 per cent and minus 6.2 per cent, respectively.

The reasons for sluggish consumer spending are unclear, although cuts to electricity subsidies, stagnant wages in some sectors and the government’s drive to boost taxes have all been cited as possible contributory factors, while it could also be that the interest rate cuts are taking time to have an effect. Loan disbursement subdued this year

In November BI lowered its forecast for full- year lending growth to between 8 per cent and 10 per cent, two percentage points lower than its earlier forecast, after credit growth reached just 3.8 per cent between January and September.

The bank cited low domestic demand for credit and the broader conditions of the local and global economy as factors behind the muted performance.

In 2016 credit growth was also subdued, expanding by 7.9 per cent during the year, according to Ministry of Finance data.

There was a bright spot heading into the second half of 2017, however, as credit levels rose slightly to 7.78 per cent by the end of September, up from 7.75 per cent in June.

If this trend continues in the final quarter, this could pave the way for increased domestic spending and investment heading in 2018. Current account gap narrows

Rising exports and strong inflows into financial and capital accounts in the third quarter of this year led to a reduction in the country’s current account deficit.

Indonesia reported a current account deficit of US$4.3 billion in the third quarter, equivalent to 1.7 per cent of GDP, down from 1.9 per cent of GDP in the second quarter, according to the BI. The bank said the contraction was the result of an increase in the volume and value of exports, which outpaced a corresponding rise in imports resulting from rising domestic demand.

Capital and financial inflows also spiked in the third quarter due to an influx of foreign direct investment, leading to a balance of payments surplus of US$5.4 billion, US$4.6 billion higher than in the second quarter.

The BI said that by October, Indonesia’s trade surplus had reached US$11.8 billion, an improvement of US$4.1 billion on the same period in 2016. Foreign and domestic investment on the rise

In another positive development, investment rose steadily in 2017 from both domestic and overseas sources.

According to data issued by the Indonesia Investment Coordinating Board at the end of October, total direct investment in the first nine months reached 513.2 trillion (US$37.9 billion), up 13.2 per cent on the same period in 2016.

Direct investment in the third quarter totalled 176.6 trillion rupiah (US$13.1 billion), marking a y-o-y increase of 13.7 per cent. Of this, 111.7 trillion rupiah (US$8.3 billion) was foreign direct investment, the majority of which was channelled into the metal, machinery and electronics industries.

The domestic balance of 64.9 trillion rupiah (US$4.8 billion) saw strong capital inflows to the utilities sector and the property market.

The increasing flow of investments should help support industries across the economy, with construction, real estate and manufacturing all set to benefit as Indonesia heads into 2018. Steady outlook for growth

Higher exports and investment coupled with an upswing in domestic demand and modest credit growth is expected to boost Indonesia’s GDP to 5.3 per cent in 2018, according to a press release issued in November by the IMF upon the conclusion of its Article IV consultation.

The IMF noted that risks to growth, such as a sudden halt in capital inflows, a slowdown in the Chinese economy and geopolitical tensions, were mainly external.

A potential rise in interest rates and possible shortfalls in tax revenue caused by tighter global financial conditions were flagged as the main domestic threats, while stronger global growth and commodities prices were cited as having the potential to enhance economic development.

This Indonesia economic update was produced by Oxford Business Group.