Is Indonesia's Economy Bouncing Back?

Indonesia, so recently looking like one of Asia’s sick men as economic nationalism grew and the year-old presidency of Joko Widodo looked to be adrift, may not be that sick after all. The Asian Development Bank says economic growth, buoyed by rising public investment in infrastructure and the latest spate of economic reforms, is expected to pick up in 2016.

Indonesia, like every other country in the region, has been hit by falling commodity and manufacturing exports and a currency that has fallen by 11 percent in a year. But corporate earnings have held up, broad money supply growth is supporting asset prices and President Jokowi, as he is known, seemingly in the past couple of months has begun to assert himself in several ways, most of them encouraging.

Exports annually are down 12 percent in US dollar terms, part of that because of an ill-conceived ban on unprocessed resources including ores. But with the rupiah having fallen sharply, the services sector is performing well.

The ADB report, issued as a part of the Asian Development Outlook Update, forecasts Indonesia’s gross domestic product 2016 growth at 5.4 percent, trimmed from 6.0 percent in March but an improvement over the 4.9 percent growth expected earlier this year. In March, ADB forecast 2015 growth of 5.5 percent. The Purchasing Manager’s Index, below 50 for a full year, rose slightly in August. (Anything below 50 indicates shrinkage, anything above indicates growth). Net capital flows, which went negative in the third quarter of 2014, have recovered strongly.

“Delay in economic recovery is primarily due to weaker-than-anticipated external demand and financial market volatility,” said Steven Tabor, ADB Country Director for Indonesia. “The impact of accelerated emphasis on deregulation, stronger infrastructure investment, and export recovery triggered in part by devaluation are likely to spur economic expansion in the coming year.”

In particular, Jakarta has finally begun to untangle itself over infrastructure spending, increasingly crucial to cope with the growing economy. So far building the infrastructure has been held up by slow fund disbursement. But, according to the ADB, the government “has taken measures to improve budget execution, which include efforts to simplify land acquisition procedures, and advancing to 2015 the tendering process for procurement of most public projects under the 2016 budget to expedite implementation.”

Policy reforms that Jokowi ordered in early September – as Asia Sentinel reported, sending his cabinet to Bogor to work on them nonstop -- are expected to stimulate private investment. Reforms include a new one-stop service for investment licensing and encouraging private investment in selected infrastructure projects through public-private partnership.

“Earlier this month, the government unveiled a package to revive investment that further simplifies or removes regulations that hinder business, expand tax incentives, accelerates strategic projects, and allows foreign ownership of high-end properties, the ADB said.

The administration has pushed through a pay rise for civil servants and tax breaks for low-income earners, which should contribute to growing consumer spending. The psychological effect of Jokowi’s painful decision at the start of his administration to cut fuel subsidies drastically and divert the money to public spending will foster consumer spending. Inflation, partly as a result of the plummeting currency is expected to start easing towards the end of the year, the ADB report states.

“There is a risk to this growth prospect coming from global financial market turbulence, but the country’s resilience against market volatility has improved, partly due to a more flexible exchange rate and market-driven adjustment to bond yields,” said Edimon Ginting, ADB Deputy Country Director for Indonesia. He said the government was well placed to manage risks including delays in infrastructure investment, slow progress on structural reforms, and potentially severe impact of El Niño weather conditions.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region, including Indonesia. In 2014, ADB assistance totaled $22.9 billion, which includes cofinancing of $9.2 billion.