Coface expects Indonesia to see a slight improvement in GDP growth to 5.5% in 2015 on the back of reviving global demand. This will mostly be achieved by a pickup in investment and consumption spending.
While consumption continued to be the major contributor to Indonesia’s economic output (i.e. 66% of GDP), the consumption growth momentum was hindered in 4Q 2014 as a result of a drastic increase in gasoline prices in November (from 6500rupiah/litre to 8500rupiah/litre) and diesel (from 5500rupiah/litre to 7500rupiah/litre).
The central bank (Bank Indonesia) also lifted the policy rate by 25bps to 7.75% on 18 November, after an unscheduled meeting, as a pre-emptive measure to tackle inflation in the country. The surprise policy has caught businesses and consumers off-guard and has contributed to the lower consumption growth.
Risks
Slower commodity demand and export bans represent additional downside risks to the Indonesian economy.
Indonesia is an exporter of crude oil and an importer of refined oil. While the decline in crude-driven commodity prices could help ease Indonesia’s inflation (i.e. CPI averaged 6.4% Y-o-Y in 2014), as an exporter of crude, the country is hurt by the lower prices. Moreover, export demand growth of other commodities is also facing headwinds.
Commodity exports represented some 5.6% and 4.5% of GDP in 2012 and 2013, compared to an estimated 4.2% in 2014. The slowdown represents both the effect of slower global commodity demand growth as well as the export bans of low value-added commodities (e.g. iron ore) effective in January 2014. Coal as an export commodity saw a decline of over 30% in 2014.
Twin-deficits situation is easing slightly, but rupiah remains exposed to volatility.
The current account deficit eased slightly to 2.95% of GDP in 2014 (vs. 3.18% in 2013), and it is set to improve to around 2.9% in 2015 on the back of the global demand recovery. Yet, Indonesia’s exports remains highly reliant on Japan and China – which represented 14.8% and 12.4% of direct exports in 2013, respectively – and the uncertain outlook in these countries will have negative impact on the country’s exports.
President Jokowi’s administration is pushing reform effort forward.
After receiving over 53% support in the July election last year and coming into the office in October, President Jokowi’s government came to work and pushed forward a range of initiatives.
Tackling corruption is a primary goal of the government – while Indonesia did see a slight improvement in recent years, scoring 31.6 in 2013 (vs. 23 in 2009) in World Bank’s Worldwide Governance Indicator (WGI) – Control of Corruption Index, it lags behind China (46.9) and India (35.9).