Solid growth, supported by strong investment flows, should put Indonesia on a firm footing going into the new year, despite a slight drop in expectations.
On November 16 Bank Indonesia (BI) sharpened its forecast for year-end growth to 5.1%, at the lower end of projections made earlier in 2017 of between 5% and 5.4%.
The revision came after third-quarter growth reached 5.06% year-on-year (y-o-y), up from 5.01% in the two previous quarters, but below market expectations.
In a move that could help bolster growth in early 2018, BI also maintained all of its key rates in November for a second consecutive month, namely the seven-day reverse repo rate, which was held at 4.25%, the deposit facility rate (3.5%) and lending facility rate (5%). Its decision came after the lender implemented total cuts of 0.5% in August and September.
However, despite eight rate cuts since the start of 2016, consumption has remained subdued, with many Indonesians opting to save rather than spend.
Growth in the retail sector slowed towards the end of the year, with BI’s real sales index (RSI) slipping to 1.8% y-o-y in September compared to 2.2% in August. Sales in September were also down y-o-y, with the growth rate of both food and non-food sales dipping 0.3% to 7.6% and -6.2%, respectively.
The reasons for sluggish consumer spending are unclear, although cuts to electricity subsidies, stagnant wages in some sectors and the government’s drive to boost taxes have all been cited as possible contributory factors, while it could also be that the interest rate cuts are taking time to have an effect.
In November BI lowered its forecast for full-year lending growth to between 8% and 10%, two percentage points lower than its earlier forecast, after credit growth reached just 3.8% between January and September. The bank cited low domestic demand for credit and the broader conditions of the local and global economy as factors behind the muted performance.
Last year credit growth was also subdued, expanding by 7.9% during the year, according to Ministry of Finance data.
There was a bright spot heading into the second half of this year, however, as credit levels rose slightly to 7.78% by the end of September, up from 7.75% in June. If this trend continues in the final quarter, this could pave the way for increased domestic spending and investment heading into the new year.
Rising exports and strong inflows into financial and capital accounts in the third quarter of this year led to a reduction in the country’s current account deficit.
Indonesia reported a current account deficit of $4.3bn in the third quarter, equivalent to 1.7% of GDP, down from 1.9% of GDP in the second quarter, according to the BI. The bank said the contraction was the result of an increase in the volume and value of exports, which outpaced a corresponding rise in imports resulting from rising domestic demand.
Capital and financial inflows also spiked in the third quarter due to an influx of foreign direct investment, leading to a balance of payments surplus of $5.4bn, $4.6bn higher than in the second quarter.
The BI said that by October, Indonesia’s trade surplus had reached $11.8bn, an improvement of $4.1bn on the same period last year.
In another positive development, investment rose steadily in 2017 from both domestic and overseas sources.
According to data issued by the Indonesia Investment Coordinating Board at the end of October, total direct investment in the first nine months reached Rp513.2trn ($37.9bn), up 13.2% on the same period in 2016.
Direct investment in the third quarter totalled Rp176.6trn ($13.1bn), marking a y-o-y increase of 13.7%. Of this, Rp111.7trn ($8.3bn) was foreign direct investment, the majority of which was channelled into the metal, machinery and electronics industries. The domestic balance of Rp64.9trn ($4.8bn) saw strong capital inflows to the utilities sector and the property market.
The increasing flow of investments should help support industries across the economy, with construction, real estate and manufacturing all set to benefit as Indonesia heads into 2018.
Higher exports and investment coupled with an upswing in domestic demand and modest credit growth is expected to boost Indonesia’s GDP to 5.3% in 2018, according to a press release issued in November by the IMF upon the conclusion of its Article IV consultation.
The IMF noted that risks to growth, such as a sudden halt in capital inflows, a slowdown in the Chinese economy and geopolitical tensions, were mainly external.
A potential rise in interest rates and possible shortfalls in tax revenue caused by tighter global financial conditions were flagged as the main domestic threats, while stronger global growth and commodities prices were cited as having the potential to enhance economic development.
For further analysis on Indonesia’s economic performance this year, please see OBG’s newly released Indonesia 2017 Report.
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