Economic Update

Published 30 Jan 2017

Structural reforms coupled with solid macroeconomic fundamentals saw Indonesia continue its positive growth trajectory in 2016.

According to the IMF, GDP was expected to expand by 5% in 2016, just short of the 5.3% targeted in the budget and up from 4.8% the previous year.

Inflation, meanwhile, remained within the target range of 3-5% for the second year running, according to the fund, which forecast an increase of 3.3% in 2016 and just over 4% this year.

While the value of both exports and imports fell by 4% and 4.9%, respectively, last year, higher commodity prices for many of Indonesia’s exports, such as coal and palm oil, saw the current account deficit narrow to $17bn, or around 1.8% of GDP. This was down from $17.8bn, or 2.1% of GDP, in 2015, according to central bank data.

Combined with 10% growth in foreign exchange assets, which reached $116.4bn at the end of 2016, the improved current account situation saw the balance of payments hit an $11bn surplus. Annual growth in both foreign and domestic direct investment, meanwhile, rose 12.4% to Rp612.8trn ($45.8bn), as per figures from the Indonesia Investment Coordinating Board.

A series of economic reforms enacted since late 2015 should drive further investment growth in the near term as the current administration continues to lift barriers to private investment and improve the business environment.

Economic liberalisation packages

Last year the authorities rolled out five of the 14 economic liberalisation packages released to date, with the first implemented in February. Some 35 industries – including cold storage, sports centres, toll road operations, warehousing and tourism – were removed from the negative investment list, which specifies business activities that are closed to foreign investment. 

A restriction on foreign e-commerce investments with a market value of more than Rp100bn ($7.5m) was also lifted. This burgeoning sector was the focus of the 14th reform package, released in November, which serves as an e-commerce roadmap for the 2016-19 period, and includes provisions to ease and widen access to funding for companies operating in the sector.

Expanding the tax base

Broadening the tax base and improving collection has also been a key aim of the government. Low commodity prices and tax revenues had a knock-on effect on spending, which fell by one percentage point to 16.6% of GDP last year, according to IMF estimates.

To that end, in July the government launched a tax amnesty programme to repatriate assets held offshore. Under the programme, Indonesians pay a tax rate starting at 4% on repatriated assets, with the tariff increasing in phases to 10% as the programme draws to a close in March of this year.

According to government figures, between July and September the Ministry of Finance collected Rp97.2trn ($7.2bn), or 58.9% of the targeted Rp165trn ($12.3bn).

Powering growth

Tackling a long-standing infrastructure deficit, which has driven transportation and logistics costs to some 27% of GDP, according to the World Bank, is another critical priority, with the bank estimating that bringing these costs down to 16% of GDP, would allow Indonesia to save $80bn annually.

To this end, Rp313.5trn ($24.6bn) was earmarked for infrastructure development in the 2016 budget – the highest outlay ever allocated for the sector – and local press reported in March that construction would begin on more than 1000 km of toll roads by 2020.

Power projects will be a major focus of the infrastructure drive, with plans to expand generation capacity through a mix of traditional and alternative sources. This should go some way towards satisfying domestic demand for electricity, which is on track to rise from 206.5 TWh in 2013 to 442.5 TWh by 2022, according to a report by market intelligence firm Transparency Market Research.

To help fulfil this demand, the government has set an ambitious goal of adding 35 GW of installed capacity by 2019 and increasing the share of the population with access to electricity from 85% to 98% by 2022.

Looking ahead

Pro-business reforms, an expanded tax base and improvements in infrastructure should help Indonesia continue on a path of economic growth.

Both the IMF and the Ministry of Finance expect GDP growth to accelerate to 5.1% in 2017, with the former noting in its November Article IV consultation that the majority of risks faced are associated with external factors, including tighter global financial conditions, weaker growth in China, low commodity prices and uncertainties about US policies under the Trump administration.