05/21/2015
Indonesia / GDP
We expect the government’s GDP, inflation and currency forecasts to be revised for both 2015 and 2016.
As seen in Indonesia’s preliminary 2016 budget talks, the government expects GDP growth to come in within 5.8%-6.2% next year. We think this is optimistic. Our current forecast for GDP growth is at 5.5% in 2016, which is already an improvement from the current pace of growth at around 5%. Getting back to 6% is not impossible, of course, but there is an urgent need for a boost to private consumption. As long as investment growth remains lacklustre, we think the key to faster GDP growth going forward is more aggressive (and efficient) fiscal spending.
On that front, it is also interesting to note that the government projects a conservative fiscal deficit around 1.7%-2.1% of GDP next year. We continue to think that the government has room to run a larger fiscal deficit than current targets. At 25% of GDP, public debt is relatively low in Indonesia. Also, fiscal deficits have been smaller in Indonesia compared to similarly rated countries. Arguably then, there is room to spend more to support growth potential in the medium-term.
The government’s inflation estimate also looks to be overly optimistic. Consumer price index (CPI) inflation is projected to ease to between 3% and 5% by end-2016, even as the Indonesian rupiah is expected to weaken (at least from the assumed rate of of 12,500 rupiah to the US dollar this year). A weak sentiment on the rupiah and uncertainties over the oil price trajectory going forward mean inflationary expectations are still biased to the upside going forward. Even the 5% inflation target for end-2015 is no longer a certainty at this point.
Expect these numbers to be revised. Indeed, the same goes for the 2015 budget assumptions. GDP growth at 5.7%, the US dollar at 12,500 rupiah and year-end CPI inflation at 5% look increasingly unlikely for this year.
