Indonesia: Economy

Government policies to restrain domestic demand and to rein in inflation and the current account deficit have kept Indonesia’s economy subdued this year. The slowdown is sharper than anticipated, mainly owing to weakness in exports, particularly commodities, as well as deceleration in fixed investment and government spending. Growth in gross domestic product (GDP) at 5.2% in the first half was the slowest since 2009. Private consumption remained robust, helped by receding inflation, good harvests, and spending related to parliamentary and presidential elections.

Selected Economic Indicators (%) - Indonesia 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 5.7 5.3 6.0 5.8
Inflation 5.7 5.8 4.8 6.9
Current Account Balance (share of GDP) -2.9 -3.2 -2.0 -2.5

Source: ADB estimates.

While growth forecasts are trimmed from the Asian Development Outlook (ADO) 2014 in April, optimism about timely reform by the incoming government and a better outlook for exports next year suggest that growth will accelerate by 0.5 percentage points in 2015.

Inflation ebbed in the first 8 months as the impact of a hike in administered fuel prices in June 2013 faded and the good harvests kept food price inflation low. For 2014 as a whole, inflation is now seen averaging 5.8%, slightly above the earlier forecast. The new government is expected to reduce fuel subsidies in 2015, which should free considerable budget funds for infrastructure and social development, though it will temporarily push inflation to 6.9%, above the earlier projection.

A larger trade surplus resulted in the first half as imports declined more steeply than exports, but after taking into account income and trade in services the current account recorded a deficit equal to 3.1% of GDP. Large inflows of foreign direct and portfolio investment kept the balance of payments in surplus. International reserves rose, and the rupiah appreciated against the US dollar. This ADO Update projects that current account deficits will narrow through the forecast period, but not as much as foreseen in April.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.