Indonesia: Economy

Indonesia’s government has taken steps to accelerate budget execution that, in tandem with an annual pattern of much higher disbursements in the fourth quarter, should lift the contribution to growth from public investment in the second half of this year and into 2016.

Selected economic indicators (%) 2015 2016
ADO 2015 Update ADO 2015 Update
GDP Growth 5.5 4.9 6.0 5.4
Inflation 5.5 6.7 4.0 5.1
Current Account Balance (share of GDP) -2.8 -2.5 -2.4 -2.1

Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

Deceleration in both fixed investment and household consumption and weak exports in Indonesia have dampened economic growth this year. The government boosted its budget allocation for infrastructure investment but only 10% was disbursed in the first half. Household consumption moderated in response to higher inflation and tighter consumer credit. As a result, GDP growth slowed to 4.7% year on year in January–June.

Inflation has abated only gradually to average 6.9% year on year in the first 8 months, prompting upward revisions to forecasts. After cutting fuel subsidies in November 2014, the government has raised prices for fuel, cooking gas, and electricity.

Current account deficits look likely to be smaller than previously anticipated, mainly on a plunge in imports. Merchandise exports fell by 12.4% in US dollars in the first half, and they have continued to decline on soft external demand and falling prices for export commodities. Merchandise imports fell even more steeply in the first half, by 17.7%, due to rupiah depreciation, decelerating investment, and lower oil imports. The trade surplus climbed, and the current account deficit narrowed to equal 2.0% of GDP.

Economic prospects

Household consumption will benefit in 2016 from somewhat lower inflation and from pay raises for the civil service. External demand is also seen improving in 2016. Economic growth is forecast to dip in 2015 and recover in 2016, both projections trimmed by 0.6 percentage points from March.

Inflation is seen easing to 4%–5% by the end of 2015. An unexpectedly severe El Niño could damage crops and add to inflationary pressures.

Next year, improved demand from the major industrial economies is seen further shrinking the current account deficit, assisted by rupiah depreciation.

Excerpted from the Asian Development Outlook 2015 Update.