Indonesia's 5% GDP growth remains elusive

Fuel price is once again a hot topic in the local media. Given how global crude oil price remains soft, there is some expectation for lower fuel prices, arguably crucial to boost consumption growth into 2016. There is no indication, however, that a change in fuel prices is imminent. A weak rupiah against the US dollars continues to negate the impact from lower crude oil price on domestic fuel prices. 

In any case, the main drag on the economy is weak investment growth. While consumption growth has moderated in recent years, at 5% currently, it remains in line with its long-term historical trend. Investment growth is poor, below 4% this year, as compared to its long-term trend of close to 8%. Lower fuel prices are unlikely to provide much of a lift for investment growth. 

The key to stronger GDP growth lies with the government. A more aggressive fiscal policy is warranted to stop a downward spiral in GDP growth momentum. The string of measures announced by the government in September is mostly focused to improve investment climate. With the rupiah still anticipated to weaken though, demand for new investment is likely to remain poor, given the high import content of production. The government needs to provide the spark to get things rolling again in the economy. 

While government still targets to spend 85% of its budget by the year-end, 75- 80% seems more plausible, considering the current run-rate. Whichever the case though, bulk of the impact may only be felt in early-2016. Given that there has been no sign of a marked turnaround since June, 3Q GDP data due in mid-Oct is unlikely to bring much to cheer about in the markets.