Major Reforms Could Spur Indonesia’s Growth, Says ADB

News Release | 25 September 2014

JAKARTA, INDONESIA – The Indonesian economy is expected to slow on weak export performance in 2014 before picking up in 2015 as external demand improves and the new government’s reform agenda takes hold, says a new Asian Development Bank (ADB) report.

In an update of its flagship annual economic publication, Asian Development Outlook 2014, ADB trimmed its forecast for 2014 growth in Indonesian gross domestic product (GDP) to 5.3% from 5.7% expected in April. ADB forecasts growth of 5.8% in 2015, down from 6.0% in April.

“Growth has been constrained this year by tighter monetary conditions and the ban on unprocessed mineral ores that dented exports,” said ADB’s Deputy Country Director for Indonesia, Edimon Ginting, in launching the report. “But major planned reforms to further improve the investment climate, boost the efficiency of the bureaucracy and accelerate infrastructure development, could improve growth prospects going forward.”

GDP growth slowed to 5.2% in the first half of 2014, the slowest pace since 2009, after the central bank raised interest rates last year to restrain domestic demand and rein in inflation and the current account deficit. The slowdown has been sharper than anticipated, due mainly to weak exports as several major export markets grew less quickly than expected.

Merchandise exports fell 2.3% in United States (US) dollar terms in the first half, weighed down by subdued demand and soft prices for export commodities including coal and rubber. Merchandise imports fell 4.4%, led by raw materials and capital goods. The trade surplus nearly tripled in the first half from a year earlier to $2.9 billion. Deficits in services trade and in the income account produced a current account deficit of $13.3 billion, equal to 3.1% of GDP.

Private consumption, which accounts for almost 60% of GDP, grew a robust 5.6% in the first half and made the biggest contribution to GDP growth from the demand side. Consumption received a boost from election-related spending. Decelerating inflation and good harvests supported consumer confidence and farmers’ incomes, but tighter credit hurt sales of consumer durables such as automobiles.

Foreign direct investment was relatively buoyant at $10.5 billion, and portfolio investment inflows rose sharply to $16.8 billion in the first half. Foreign investors increased their holdings of government bonds by $7.3 billion in the January to August period. These large inflows more than offset the current account deficit to keep the balance of payments in surplus. The Indonesian rupiah appreciated by 4.1% against the US dollar in the first eight months of 2014, after depreciating 19.5% in 2013.

The growth outlook for 2014 and 2015 assumes the new government, which takes office in October 2014, will implement the major policies outlined during the elections: improving the investment climate, reforming the bureaucracy, and accelerating infrastructure development. The 0.5% uptick expected in 2015 will be driven by a stronger outlook for the major industrial economies, which should spur exports and investment.

Growth in private consumption is projected to remain robust. Lower inflation is supporting consumption this year, and the government is expected to use cash transfers to compensate low-income groups for higher fuel prices in 2015.

Private investment is seen improving over the forecast period, benefiting from the successful national elections and expectations that the new government will implement reforms. Growth in investment loans remains high at 30% despite tighter monetary policy.

Inflation is seen averaging 4.2% in the second half of this year and will likely average 5.8% for the full year, slightly higher than expected due to additional increases in electricity tariffs and likely upward pressure on food prices from the anticipated dry weather late in 2014. Inflation is projected to increase temporarily to average 6.9% in 2015, assuming the government increases fuel prices by 30%–50%.