Fi­nance min­is­ter: In­done­sia’s econ­omy may beat ex­pec­ta­tions

The Star Malaysia - StarBiz - - Foreign News -

JAKARTA: In­done­sia’s fi­nance min­is­ter said South-East Asia’s big­gest econ­omy could ex­pand at a faster pace next year than ini­tially fore­cast.

Eco­nomic growth may po­ten­tially be boosted by a pickup in in­vest­ment in 2018, Sri Mulyani In­drawati said in an in­ter­view in Jakarta Fri­day. At the same time, she warned of sig­nif­i­cant head­winds from “do­mes­tic-ori­en­tated poli­cies, es­pe­cially in ma­jor coun­tries”, such as the flow-through ef­fects of US Pres­i­dent Don­ald Trump’s plans to slash cor­po­rate tax rates.

In­done­sia’s econ­omy is fore­cast to grow by 5.4% next year, the fastest pace of ex­pan­sion in five years, with a bud­get passed by the par­lia­ment last week pro­ject­ing a nar­rower deficit and higher tax rev­enue. Just days af­ter the plan’s ap­proval, In­drawati is al­ready sound­ing more up­beat.

“The growth rate of 5.4% is based on a com­bi­na­tion of a pick-up in ex­ports, but with in­vest­ment that is still a bit con­ser­va­tive,” In­drawati said. “If we as­sume that in­vest­ment will pick up, then I think we will have much more up­side.”

To­tal in­vest­ment re­al­i­sa­tion rose 13.7% to 176.6 tril­lion ru­piah in the third quar­ter, helped by a 12% jump in for­eign di­rect in­vest­ment, In­done­sia’s In­vest­ment Co­or­di­nat­ing Board said yes­ter­day.

In­drawati’s op­ti­mism comes with some caveats. The econ­omy faces other head­winds from rising in­ter­est rates in the US, with the cur­rency com­ing un­der pres­sure in re­cent weeks. The ru­piah has dropped more than 3% against the dol­lar since reach­ing a 10-month high in Septem­ber.

The cur­rency has also fallen as the US pres­i­dent’s tax-cut plan boosted the dol­lar. The pres­i­dent and Repub­li­cans won ini­tial ap­proval from con­ser­va­tive groups at the end of Septem­ber for a long-awaited plan that would cut cor­po­rate tax from 35% to 20%.

“Of course the an­nounce­ment by Pres­i­dent Trump on tax re­form, low­er­ing the rate, is cre­at­ing again pres­sure for In­done­sia,” In­drawati said.

“A race to the bot­tom is wor­ry­ing for all be­cause it’s not a win-win game,” she said.

With the Fed­eral Re­serve em­bark­ing on tight­en­ing mone­tary pol­icy through fur­ther rate in­creases and an un­wind­ing of its bal­ance sheet, In­done­sia’s cen­tral bank hit the pause but­ton this month af­ter eight rate cuts since the be­gin­ning of last year. The full ef­fect of that ag­gres­sive run of eas­ing is yet to fil­ter through to the broader econ­omy, In­drawati said.

The trans­mis­sion of the rate cuts to bank len­ders “could be much more ef­fi­cient,” In­drawati said. “But I think it will come, maybe with a lag of be­tween 12 and 18 months, mean­ing the re­sults can only be en­joyed early next year or the mid­dle of next year.”

De­spite the cen­tral bank’s eas­ing, credit growth has re­mained lack­lus­ter. Bank lend­ing grew 7.86% in Septem­ber from a year ear­lier, ac­cord­ing to In­done­sia’s fi­nan­cial ser­vices au­thor­ity, com­pared with an av­er­age growth of more than 10% two years ago.

In­drawati, 55, is try­ing to boost tax rev­enue and aims to raise the coun­try’s tax-to-GDP ra­tio from about 11% to 16% by 2019. A pa­per sup­port­ing amend­ments to in­come tax and value-added tax is be­ing pre­pared, she said, while also warn­ing that In­done­sia must be wary of the im­pact tax cuts would have on rev­enue.

“The rates will de­pend on our abil­ity to ex­pand the base be­cause if you lower the rate with the same very nar­row and lim­ited tax base, then it would be self-de­feat­ing for In­done­sia,” she said. “We have to look at it com­pre­hen­sively.”

In­done­sia’s econ­omy has been grow­ing about 5%, but re­mains well short of the 7% tar­get set by Pres­i­dent Joko Wi­dodo when he came to power three years ago. A per­sis­tent fis­cal short­fall has seen the fore­cast for the 2017 bud­get deficit trimmed to about 2.7% of gross do­mes­tic prod­uct, com­pared with the 2.9% es­ti­mated in July. In­done­sia has a le­gal limit of 3%.

The 2018 bud­get tar­gets a bud­get deficit of 2.2% of GDP next year. In­drawati said the govern­ment has a contin­gency plan in case of a rev­enue short­fall this year.

While in­creas­ing the debt limit has been pe­ri­od­i­cally raised as an op­tion since it was in­tro­duced in 2003, In­drawati said tin­ker­ing with it “would cre­ate less in­cen­tive to do the right thing in the real sec­tor.” — Bloomberg

Growth pro­pel­lant: In­drawati says the growth rate of 5.4% is based on a com­bi­na­tion of a pick-up in ex­ports. — AFP

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