Indonesia’s Economic Growth Momentum Remains Strong

The Indonesian economy expanded 5 percent year-on-year in the first quarter of 2017, compared to a 4.9 percent growth in the previous period, driven by exports and government spending while private consumption eased slightly. In the second quarter, the economy is expected to advance further, supported by robust private consumption during the fasting month of Ramadan and Eid-il-Fitr. Also, exports and investment are estimated to rise amid higher commodity prices and bring the country’s GDP growth to 5.3 percent in 2017, higher than 5 percent in 2016.

Macroeconomic Views

In the first quarter, private consumption growth slowed (4.9 percent from 5 percent in the previous period), mainly due to hikes in electricity tariffs and vehicles registration fees, which led administered prices to rise. Meanwhile, consumer confidence increased for the third consecutive month, hitting all-time high level in April. The sentiment is estimated to improve further ahead of the fasting month of Ramadan, when civil servants and private employees will usually get their 13th salaries and bonuses.

Government spending advanced 2.7 percent, following a 4.1 percent decline in the previous period. While the government is committed to deliver its projects, particularly those on infrastructure, revenue collection remains a hindrance. Whereas Indonesia's tax amnesty program was a success in terms of tax declarations, non-tax amnesty revenue collection in the country actually weakened last year. In the second quarter, budget execution is expected to improve, supported by the continuation of early procurement initiatives implemented in a number of line ministries.

Regarding investment climate, investors were cautious in the first quarter 2017, due to rising religious and ethnic tension in Jakarta related to the then Jakarta Governor Basuki Tjahaja Purnama. However, these tensions have largely receded after he was defeated in the regional election. 

Exports went up 8 percent, much faster than a 4.2 percent rise in the previous period and marking the strongest growth in three years. The boost was mainly led by commodities, which amount around 30 percent of total outbound shipments. The country’s key export commodities include oil and gas, crude palm oil, rubber and base metals. For imports, in particular, raw material and capital imports are projected to strengthen, in line with an expected pick up in investment.  

Central Bank Monetary Policy Stance

Recent statements by Bank Indonesia showed that it still eyes for a chance to slash the benchmark interest rate, although its current focus is on inflation management and monitoring global risks, including Federal Reserve hikes and tension in the Korean peninsula. Inflation accelerated to 4.2 percent in April, compared to a 3.6 percent in the previous month. Ahead of Ramadan, people tend to buy more food and beverages and give more charities. For 2017, the government targets inflation to reach around 4 percent, lower than 4.7 percent in 2016.

The Rupiah

In the first five months of 2017, the rupiah appreciated by 1.2 percent to 13,313 per USD, supported by heavy capital inflows from overseas. Looking ahead, the currency may experience some pressure given the likelihood of continued US monetary normalization.

Rida Husna | | Chusnul Ch Manan |
6/2/2017 4:47:13 PM