Indonesia - OECD Economic Outlook 2019

148 

Indonesia Steady growth has lifted GDP per capita by around 4% annually for several years. During 2020-21, domestic demand is projected to continue supporting growth despite external headwinds. Rising household incomes and low inflation will underpin household spending. Investment growth will edge up again, partly reflecting infrastructure projects. Weaker trade growth globally is weighing on exports in the near term.

Bank Indonesia has begun easing monetary policy to boost growth and has some scope to lower interest rates further. It has also deployed macroprudential instruments to make policy more accommodative. Fiscal policy is expected to be broadly neutral, with the budget deficit well inside the 3%-of-GDP limit. An ambitious regulatory reform programme could help boost business confidence, investment and formal employment.

Winding back fossil fuel subsidies, matched by more targeted social benefits, would improve environmental and social outcomes.

Growth remains resilient Declining poverty rates, low inflation, healthy employment growth, and social assistance programmes are all supporting incomes and consumption. Consumer confidence has ebbed but remains high. Inflation is low. Commitments to freeze fuel and electricity prices in 2018-19 have contained administered prices.

Investment growth has eased from its fast pace, partly because some government projects were postponed to reduce imports. However, bank loans for investment are growing strongly.

Export growth has slowed. Government policies to reduce fuel imports by diverting exports to domestic use have dramatically reduced exports and imports. Growth in other exports is also soft. Lower prices for key commodities are weighing on export income and the terms of trade. Overall, the current account deficit has been contained at 2.9% of GDP over the past year.

Indonesia 1 % 20

Poverty rates are falling

Weak exports are dragging on growth

Share of population below national poverty line¹

Contributions to year-on-year real GDP growth Services

Rural

3.0

Oil and gas

Urban

% pts 3.5

Goods ex-oil and gas

2.5

15

2.0 1.5 10

1.0 0.5

5

0.0 -0.5

0

2011 2012 2013 2014 2015 2016 2017 2018 2019

0

0

2017

2018

2019

-1.0

1. The poverty line is based on the minimum expenditure for food equivalent to 2 100 kilocalories per day, and basic housing, clothing, education and health needs.

Source: CEIC database.

StatLink 2 https://doi.org/10.1787/888934045525

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

 149

Indonesia: Demand, output and prices

2016

2017

Current prices IDR trillion

Indonesia GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Private consumption deflator General government financial balance (% of GDP) Current account balance (% of GDP)

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

12 401.7 7 171.5 1 181.6 4 040.2 12 393.3 - 85.4 12 307.9 2 367.4 2 273.5 93.8

5.1 5.0 2.1 6.2 5.1 -0.2 4.8 8.9 8.1 0.3

5.2 5.1 4.8 6.7 5.6 0.8 6.3 6.5 12.0 -1.0

5.0 5.2 4.8 4.7 5.0 -1.0 3.8 -0.1 -6.2 1.3

5.0 5.2 3.3 5.2 5.0 0.2 5.2 2.5 3.0 0.0

5.1 5.5 4.5 5.6 5.4 0.0 5.3 3.6 4.9 -0.2

_ _ _ _ _

4.3 3.8 3.4 -1.9 -1.6

3.8 3.2 3.2 -2.2 -3.0

1.7 3.2 3.3 -1.9 -2.8

2.7 3.5 3.5 -1.7 -2.8

3.6 3.4 3.2 -1.7 -2.8

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046513

Indonesia 2 Interest rates are declining

The central government budget deficit has narrowed¹

% 14

% of GDP 0.0

12 -0.5 10

-1.0

8

-1.5

6

-2.0

4

Limit according to the fiscal rule

Government 10-year bond rate

2 0 2015

-2.5

Lending rate for investment loans

-3.0

7-day reverse repo rate

2016

2017

2018

2019

0

0

2007

2009

2011

2013

2015

2017

2019

-3.5

1. Data for 2019 and 2020 are budgeted figures.

Source: CEIC database; and OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934045544

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

150 

Policy continues to balance stability and growth Monetary policy now focusses more on economic growth than a year ago when stability concerns gained primacy amid capital outflows. Policy easing by major central banks has created space for Bank Indonesia to lower interest rates without sacrificing stability. From July to October, it lowered policy rates by 100 basis points. Bank lending rates and long-term government bond yields have declined substantially, implying easier financial conditions. The inflation target will be lowered to 3% +/-1% in 2020 and inflation is expected to be in that range, implying scope to lower interest rates further.

Bank Indonesia has actively used macroprudential tools to make its overall policy stance more accommodative overall. Through various measures it has sought to lower interest rates and promote credit growth. For example, maximum loan-to-valuation ratios have been removed for the first loan on a property when banks meet certain criteria. While the raft of measures to encourage lending can stimulate growth, they do come with risks. Accordingly, banks’ lending standards should be monitored carefully for signs that credit quality has deteriorated. Continuing efforts to deepen financial markets will add to the overall resilience of the financial system.

Fiscal policy is expected to be broadly neutral, with the government focussed on containing the overall deficit and using the composition of revenue and expenditure to enhance growth. The central government budget deficit is on course to narrow to less than 2% of GDP in 2020. There is ample space to react if the growth outlook deteriorates. Infrastructure spending is to be revived through guarantees and other instruments to promote public-private partnerships. Given the associated fiscal risks, alternatives such as concessioning and foreign direct investment should also be promoted. Social assistance could be better targeted by gradually replacing direct and indirect fossil fuel subsidies with transfers.

Raising revenues remains a major challenge to realise spending plans. Lower commodity prices and trade are weighing on revenues, as will new tax incentives to stimulate investment. Non-tax-related factors that are likely to be more important in firms’ investment location decisions should be tackled. Raising tax compliance remains critical, through administrative simplification to improve voluntary compliance and making better use of available data to strengthen enforcement.

Renewed reforms are needed to spur private investment and job creation, and to raise productivity.

Streamlining and simplifying business regulations should remain a priority. Improvements to the online single submission system are ongoing and should continue based on user feedback. Reducing stringent labour market regulations, accompanied by measures to support workers, would make it easier to hire workers formally. More sectors should be opened to foreign investment, as discussed. Sustaining the fight against corruption is also crucial. Policy uncertainty in the mining sector should be addressed too. At the same time, some regulations need better enforcement, as evidenced by the widespread forest fires associated with illegal clearing of peatland despite stronger de jure regulations.

The domestic economy will remain solid notwithstanding external headwinds GDP growth is projected to remain around 5% during 2020-21. Ongoing employment growth, the expansion of social assistance and lower interest rates will support robust consumption growth. Investment is expected to pick up thanks to the lifting of election-related uncertainty and more supportive financial conditions. Postponed infrastructure projects are set to resume in 2020. Slowing growth in China will hold back exports but rising demand in other key trading partners will partly offset this. Inflation is projected to remain within Bank Indonesia’s target range.

A key risk to growth in 2020-21 is that trade tensions worsen, hurting commodity prices and exports. If global risk aversion rose, renewed capital outflows could necessitate higher interest rates, weighing on domestic demand, particularly investment. Conversely, if the level of domestic or global uncertainty eased and confidence rose, investment would be stronger than expected. Faster completion of large infrastructure projects would boost growth.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019