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Jakarta Post

EDITORIAL: Economic outlook rosy


    The Jakarta Post

Jakarta   /   Wed, January 3, 2018   /   08:11 am
EDITORIAL: Economic outlook rosy A concrete jungle; a night view of skyscrapers in Jakarta. (Shutterstock/File)

Most key indicators of the financial market last year were quite positive. The composite index at the Indonesian stock market rose by 20 percent to an all-time high of 6,355. The rupiah remained virtually stable with a depreciation of merely 0.8 percent with a volatility range of only 3 percent, as against 8 percent in 2016.

With inflation kept at below 3.6 percent, foreign trade was in surplus albeit with a small amount of US$12 billion as of November, and foreign reserves were also a record high of $126 billion or equivalent to over eight months of imports, the outlook could generate a high sense of confidence.

Investment growth was at its highest in more than four years. Not only portfolio capital inflows but foreign direct investment recorded the largest net inflow in over seven years. Export and import volumes both registered doubledigit growth. Considering continued subdued food prices and the absence of further planned energy price hikes this year, consumer price inflation is expected to be below 4 percent this year.

The 2018 state budget, designed to check fiscal deficit at 2.2 percent of gross domestic product (GDP), despite the heavy political agenda, will provide increased fiscal space in coping with the risk of moderate energy price increases.

Put briefly, macroeconomic stability has been strengthening with a stabilizing rupiah exchange rate, inflation under control, interest rates falling steadily and the government’s debt-to- GDP ratio down to less than 30 percent.

In line with the stronger macroeconomic outlook and ongoing tax policy and administration reforms, the consensus forecast among both the government and private sector is for a growth of between 5.3 and 5.5 percent this year, up from an estimated 5.1 percent last year. This expansion is still way below the economic growth capacity of 7 percent, when all its cylinders are firing, but that is still respectably high compared to other emerging economies.

But complacence would be misguided as the overall condition is still fragile because many structural reforms, which are vital to fuel sustainable, strong growth, have yet to be implemented.

Several major factors will determine whether the economy will continue to muddle through with an annual growth of 5 percent or will be able to expand at the pre1997 crisis level of 6 to 7 percent.

The first risk is related to the government’s ability to keep up the pace of its reform programs this year and to resist political pressures for populist, yet misguided, policies in the run up to the presidential and legislative elections in April 2019.

Macroeconomic stability, though vital, is not by itself sufficient to fuel robust recovery. A long agenda of structural reforms has yet to be implemented to make the economy more efficient and competitive.

The formidable challenge though is that state institutions have yet to build up adequate competence and credibility to facilitate a self-sustaining reform drive, while institution-capacity building is a long process as improvement is incremental at best. Failure in this area would erode budding confidence the international market still has in the economy.