How positive actually the economic outlook for Indonesia? With GDP growth projected to reach an average of 5.3 percent (y/y) in the medium-term, on strengthening domestic demand lifted by the upcoming regional and presidential elections, recovery in private consumption, still easy financing conditions this means very good for Indonesia. Net exports, however, will drag economic growth as investment growth is import-intensive.
Headline inflation is expected to pick up in the next few years due to higher import costs associated with higher crude oil prices. The fiscal balance is expected to narrow modestly over the forecasting horizon, in line with the smaller deficit stipulated in the 2018 budget and as critical revenue enhancing reforms are implemented. The current account deficit is expected to widen over the medium term, in line with stronger domestic demand and weaker terms of trade.
The international poverty rate (those living below USD $1.90 per day in 2011 PPP terms) is estimated to have fallen to 5.6 percent in 2017 and reach below 4 percent by 2020. Although the pace of poverty reduction is forecast to be slower than in the preceding decade, the y/y declines expected in 2017 and 2018 are larger than the y/y declines witnessed in 2015 and 2016, with stronger prospects for economic growth outweighing the effects of rising inflation.
Risks to the economic growth outlook of Indonesia are tilted to the downside. On the external front, with protectionism on the rise, there is a risk that the nascent recovery in global trade could stall, weighing on Indonesian exports and hence growth.
Although the normalization of US monetary policy is proceeding in an orderly manner, there is a risk that such movements may lead to financial volatility as markets undergo valuation corrections as seen as with the US stock market earlier this year. For example, faster-than-expected inflation could trigger unexpected monetary tightening, leading to volatile capital outflows from emerging markets.
Progress on poverty reduction could stall or be undone by economic shocks. The recent malnutrition crisis in Papua, measles outbreaks across several provinces, and the hike in rice price inflation since late 2017, are likely to have disproportionate effects on the earnings and purchasing power of the poor and vulnerable.
(Source: Indonesia Investment)