Indonesian economy likely to continue growing reasonably, real GDP growth to average 5.2% y/y in 2016-17

Indonesia recorded economic growth of 4.8% last year as is expected to continue to stay on a sound growth track, noted Scotiabank. Consumer spending, supported by better consumer confidence and rising disposable income, primarily drives the economic activity. As the Indonesian government carries on with its attempts to start stalled infrastructure projects, increasing public outlays will provide stimulus to investment.

Recovery in the private sector investment in the following quarters will continue to be dependent on the existing progress regarding deregulation and improvement in the ease of doing business in the country, said Scotiabank. But lower commodity prices and weak external demand are expected to keep negatively impacting the country’s export sector, added Scotiabank.

“Indonesia’s real GDP gains are expected to average 5.2% y/y in 2016-17”, said Scotiabank.

Meanwhile, the feasible outlook of inflation is likely to underpin an accommodative monetary policy bias until 2017 to help support economic activity of Indonesia. Since January 2016, the central bank has lowered its key interest rate by 75 bps. It is likely to ease the policy further in the following months.

Recently, Bank Indonesia stated that the 12-month reference rate will be replaced by the 7-day reverse repo rate as the benchmark interest rate on 19th August. Last month, Indonesia’s consumer prices accelerated 4.4% y/y. However, in the near term, price rises might accelerate a bit, noted Scotiabank. But the nation’s inflation is expected to be within BI’s target rate of 4%, plus or minus 1% through 2017.

Certain fiscal space has been created through latest energy subsidy forms that permit for increased welfare and public infrastructure spending. However, lower global oil prices are likely to keep holding back government revenues, leading to a slightly higher budget deficit of about 2.75% of GDP, according to Scotiabank.

“Indonesia will continue to record current account deficits through 2017, with the shortfall likely to expand slightly to 2.7% of GDP by 2017 from 2.1% last year”, added Scotiabank.