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Jakarta Post

Analysis: 2016 economic outlook: All eyes on China

  • Dendi Ramdani

    The Jakarta Post

Jakarta   /   Wed, December 23, 2015   /  05:38 pm

By and large, the Indonesia economy will improve in 2016. The key question is '€” to what extent? A research team from the office of Bank Mandiri'€™s chief economist predicts that the economy will grow at 5 percent in 2016, and potentially higher at 5.2 percent if the government is able to deliver comprehensive and consistent economic policies to push and stimulate economic activity. Several factors are key to a stronger economy.

The first factor relates to the external economy, specifically how the global economy recovers '€” in particular the Chinese economy. China is Indonesia'€™s second-largest export market after Japan, and so necessarily has a major effect on the Indonesian economy. If China'€™s economy continues to struggle, Indonesia'€™s export performance will not improve. Furthermore, it is very likely that the government of China will devalue its currency to boost its export performance. This policy will constrain Indonesian exports, as exports will become more expensive, and promote imports from China, because imports will be cheaper.

The second major determiner of economic growth will be commodity prices. Almost 80 percent of Indonesia'€™s export revenue comes from exports of commodities such as oil and gas, coal, crude palm oil, nickel and rubber. Commodity prices are difficult to predict, not only because economic variables determine the price, but also as a result of non-economic variables such as political and social conflict in the Middle East.

However, we believe that oil prices, which have the greatest influence on the prices of other commodities, will rebound. Two of the world'€™s main oil producers, namely Saudi Arabia and Russia, are very likely to control the supply to ensure high prices. These two countries have suffered from large budget deficits in the past three years. Saudi Arabia suffered a budget deficit of 19.7 percent of its gross domestic product (GDP) in 2014 and Russia had a budget deficit of 3.2 percent of its GDP. Note that Saudi Arabia is the world'€™s second-largest oil producer, with production capacity of 11.6 million barrels per day, after the US, the largest oil producer with production capacity of 12.5 million barrels per day. Russia, for its part, has production capacity of 10.8 million barrels per day.

There will, of course, be additional supply from Iran in the world market, in the wake of the lifting of US sanctions. The additional supply could threaten efforts to increase oil prices. Given the fact that the low oil prices will hurt all of the oil producers, especially if they drop below US$40 per barrel, I believe that oil prices will rebound slowly. The main oil producers will work together to control supply, and oil prices may reach $50 per barrel in mid-2016.

Others commodities, such as crude palm oil, rubber and nickel will follow the movement of oil prices. We expect to see slightly higher prices for these commodities by the middle of next year. Especially for crude palm oil and coal, the additional demand is mainly coming from India, where the economy is growing at a steady annual 7 percent. We also expect economic recovery in the US to boost demand for commodities.

Last but not least, another factor that will determine economic growth in 2016 is how the government is able to play its role effectively in managing fiscal policy (tax and government spending) and other economic policies to stimulate the economy. To date, the government has launched eight economic policy packages to promote economic growth.

However, all of the policy packages are aimed at improving and promoting investment and production '€” i.e., to boost the supply-side economy. These are good policies for the medium and long term in order to accelerate economic growth, and we may begin to see the effects after two or three years. For the short term, we need policies to boost the demand-side economy, yet we still do not have a clear direction on how the government will encourage demand, especially domestic demand. This is key, as about 54.7 percent of GDP in the third quarter of 2015 was the result of domestic consumption. Good economic management of domestic demand should therefore be the main concern.

In conclusion, we believe that the economy will in 2016 see improvement. We hope to see government policies that are consistent in promoting economic growth, with a shift away from the supply side and toward the demand side. Lastly, we hope the Chinese economy will pick up, or at least not slow further. Given the dependence of the Indonesian economy on China, if the latter'€™s economy deteriorates, it could spell very bad news for us.

The writer is head of industry and the regional research department at Bank Mandiri.

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