Friday, October 18

Indonesia: Year in Review 2018

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Indonesia posted another solid year of expansion in 2018, supported by strong growth in domestic demand, with further policy initiatives set to continue momentum moving forward.

The economy expanded by 5.2 per cent year-on-year (y-o-y) over the first three quarters of 2018, according to official figures from Statistics Indonesia, slightly above full-year 2017 growth of 5.1 per cent.

The result was driven by gains in major industries construction (6.3 per cent), vehicle and retail trade (5.1 per cent), processing (4.2 per cent) and agriculture (3.9 per cent), while strong performances were also seen in information and communications (7.8 per cent), and transport and storage (7.6 per cent).

These sectors benefitted from improved domestic demand, which, according to a statement released by Bank Indonesia (BI), the central bank, in November, was projected to increase by 5.5 per cent in 2018, driven by strong investment in government infrastructure projects.

The GDP figures align with year-end growth projections of 5.1 per cent from both the IMF and the Ministry of Finance (MoF); however, the rate is slightly down on earlier predictions of 5.4 per cent by the MoF.

BI raises rates to support weak rupiah

The year 2018 also saw the BI make a move on interest rates as part of an effort to stabilise the rupiah.

The central bank raised its benchmark rate six times between May and November, from 4.25 per cent to six per cent – the first time the rates had been increased since November 2014.

These efforts were designed to stem a drop in value of the rupiah and a subsequent reduction in foreign currency reserves.

The currency lost around 12 per cent against the dollar from January to October, falling on the back of higher US interest rates and higher oil prices, which placed pressure on Indonesia’s current account deficit.

BI’s measures were met with some success by year-end, with the currency regaining some lost ground, closing 2018 around 6 per cent down on its opening rates.

Meanwhile, inflation closed the year at a steady 3.13 per cent in December, with the BI confident the annual rate would remain within its target range of 3.5 per cent, plus or minus one per cent, for both 2018 and 2019.

Stimulus package to boost productivity

Moving forward, the government has increased efforts to drive growth and boost foreign direct investment with the launch of a new economic stimulus package in November.

The new package, the 16th released since September 2015, offers continued tax holidays to many industries operating in special economic zones, while also extending the scope of activities covered by earlier versions of the scheme, encompassing agri-processing and the digital economy.

The announcement also outlined plans to further reform the country’s Negative Investment List, which defines the series of restrictions and barriers to foreign ownership across the economy.

Analysis conducted by PwC predicted that the proposed changes, expected sometime throughout 2019, would see 54 sectors removed from the list and therefore opened up to the possibility of 100per cent foreign ownership, while a series of others would have their foreign ownership threshold raised.

The government noted that the most recent changes to the list, made in late 2016, had resulted in a 108.6per cent and 82.5per cent increase in foreign and domestic direct investment, respectively.

The incentives are expected to help support ongoing economic growth in 2019, which the BI forecasts will expand by between five per cent and 5.4 per cent, supported by continued increases in domestic demand and improved exports.

Trade tensions and election pose threat to growth

While the economy is forecast to continue its solid rate of expansion, there are some factors that pose a risk to growth.

Indonesia could be affected by the ongoing trade dispute between China and the US, with the possible expansion of tariffs holding the potential to cool the Chinese economy, one of Indonesia’s main export markets.

Another factor that will impact the economy in the coming year is the forthcoming presidential election, scheduled for April.

Though the lead-up to the poll may see increased state spending, resulting in a growth spurt for GDP, the focus of political attention on campaigning may slow the pace of economic reforms until after the election outcome is settled.

This Indonesia economic update was produced by Oxford Business Group.