Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

Analysis: Indonesian economy: Lesson learned from last year'€™s performance

  • Andry Asmoro

    The Jakarta Post

Jakarta   /   Wed, March 2, 2016   /  09:34 am
Analysis: Indonesian economy: Lesson learned from last year'€™s performance

Indonesia'€™s economy decelerated last year to a level of 4.79 percent year-on-year (yoy) despite improving its figure in the third quarter of 2015. The year of 2015 gave us many lessons to learn from and to prepare for a better economic performance this year. What are some lessons that we can take?

First, the global economic environment has changed. China'€™s slowdown has become the main risk and US economic recovery is the main hope for global economic growth.

Furthermore, the capital flow has become the main reason for currency volatility in emerging markets (EM). Indonesia'€™s currency was one of the EM currencies that experienced a big swing due to the movement of capital flows. The rupiah dropped to more than Rp 14,000 per US dollar and came back to around Rp 13,600 per dollar.

Second, monetary policies were different among countries. Tightening policies were taken by the US Federal Reserve (Fed) to signal that the US economy had improved and to avoid asset bubbles. On the other hand, loosening policies were taken by countries like China, Japan and some Euro Zone members in order to boost the domestic economy.

Third, the domestic economy needs accelerated government spending. The economic improvement starting in the third quarter 2015 was partly driven by better growth in government spending and it continued in the following quarter. Poor performance in government spending during the first half of 2015 dampened Indonesia'€™s economy. The positive thing was that private consumption still grew at the stable level of around 5 percent.

Fourth, the banking sector'€™s performance was affected by the economic condition. Worsening asset quality occurred because some commodity-based sectors were hit by lower commodity prices. Furthermore, tightening liquidity occurred because of delayed disbursement as well as some capital outflows in the middle of the year.

Now, the million dollar question is whether the economy will improve this year or not. The answer is that we have the momentum to grow from a better global economic situation. After the Fed rate hike, global volatility should be milder than last year. Recent statements from Fed officials also hinted that another rate hike could be delayed to the second half of the year or even next year. Now, the betting is mainly on China'€™s economic performance. Most global analysts believe that China will continue to decelerate up to 2017 and this should impact other countries whose main export destination is China. These countries include Indonesia, Malaysia, Singapore and the Philippines.

Indonesia could gain a momentum for growth as long as the government speeds up its spending from the beginning of the year. In the fourth quarter of 2015, spending growth increased to 7.3 percent yoy versus only 2.2 percent in the first quarter of 2015. This boosted the economy to 5.04 percent and beat market expectations.

Going forward, we still see that government spending will be the game changer for the economy, followed by investment. However, some challenges will come in financing the spending due to potential shortfalls in tax revenue. Lower spending than what is already planned is the best solution for the government instead of widening deficits and issuing bonds that could create '€œcrowd-out effects'€ or tighten liquidity in the banking sector. Actually, the best fiscal stimulus is to accelerate spending to support development.

Another kind of momentum will be come from the lower-than-expected inflation rate. We expect the inflation rate to be lower that our initial forecast this year of 5 percent. We expect it to be between 4 percent to 4.5 percent. Lower oil and commodity prices support lower goods prices in Indonesia. In fact, the government could do another adjustment on domestic fuel prices. Based on our simulation, with the assumption of the average oil price at US$35/barrel and Rp 14,000 per dollar, the economical fuel (premium) prices should be at around Rp 5,900 per liter. Hence, inflation should not become a major issue this year unless the government fails to secure food distribution. The lower inflation rate could push Bank Indonesia to cut another 25 basis points from its benchmark rate to 6.75 percent.

The combination of a lower inflation rate and aggressive government spending should boost economic growth this year. However, we still see risks that could hold economic growth at the government target of 5.3 percent. The risks come from the disbursement of central and local government spending affected by tax shortfalls and a slowdown in China'€™s growth. At this juncture, we still maintain our economic growth forecast of 5 percent for 2016.

The writer is a senior economist at Bank Mandiri.

Your premium period will expire in 0 day(s)

close x
Subscribe to get unlimited access Get 50% off now