Economic Outlook 2017: Indonesia

Given Indonesia’s 2016 performance, in which fiscal reform, accommodative monetary policy and key market factors combined to produce gross domestic product growth of 5.1 percent, the question for 2017 is, "Can it happen again?"

The Indonesian government remains cautious, setting a target of 5.1% GDP growth for this year, while the World Bank’s estimate is more optimistic at 5.3%. “We expect growth to remain stuck at around its current rate of 5% for the next couple of years,” said Oliver Jones, an economist at Capital Economics, a London research firm.

Solid domestic consumption could support economic expansion this year, while a 20% increase in infrastructure spending in the 2017 budget could help to offset lower export demand caused by slowing growth in China. Meanwhile, a tax amnesty program added 0.8% to GDP in 2016, according to estimates by Capital Economics. “However, revenues appear to have dried up now that higher penalty rates on declared assets have been imposed, so we don’t expect the scheme to raise much more,” said Jones.

Investors will be monitoring the progress of Indonesia’s ambitious regulatory plan for the country’s electronic commerce and digital technology sector, announced in November 2016. The government says it aims to nurture 1,000 technology entrepreneurs with new businesses worth US$10 billion by 2020 by improving access to funding, offering tax incentives, regulating consumer protection, e-commerce education and cyber security, and streamlining communications, logistics and transportation. “We are expecting to see new regulations that implement the roadmap in early 2017,” the Linklaters international law firm in Jakarta noted in a recent report.

One cause for concern is foreign direct investment growth, which registered 2.1% growth over the previous quarter, the slowest expansion in at least five years, data released on January 25 by the Investment Coordinating Board showed. Foreign investors have expressed concerns about Indonesia’s lack of protections, inefficient bureaucracy and difficult business climate, Wahyoe Soedarmono, an economist at Sampoerna University’s School of Business wrote in The Jakarta Post. “Given that Indonesia is in a better position than other developing countries in terms of growth prospects, opportunities to attract FDI to boost economic growth remain large,” he noted.

However, Indonesia’s attempts to attract investment are, according to some observers, being frustrated by a potentially more repressive political and social environment. One example is the ongoing trial for blasphemy of Jakarta’s Governor, Basuki Tjahaja Purnama, an ethnic Chinese Christian known as Ahok. Although the charges were the result of a videotape doctored by his opponents, Ahok faces an uphill battle for re-election on February 15.

Tanvi Gupta is a master's degree candidate at the University of Hong Kong's Journalism and Media Studies Centre.