Indonesia's economic activity will pick up pace (from the 4.9% y-o-y figure registered in Q116) over the coming quarters, supported by strong investment and public infrastructure drive (we forecast Indonesia's real GDP growth to come in at 5.2% in 2016). BI's accommodative monetary policy stance will also help to bolster investor and consumer confidence. That said, the weakening of the government's fiscal position poses downside risk to our rather constructive view.
Despite the proposed amendments to the 2016 State Budget, we maintain our forecast for Indonesia's fiscal deficit to come in at -2.7% of GDP, but note that risks are weighted to the downside. Importantly, the government has a history of missing its revenue targets, and the continuous delay in the proposed tax amnesty bill as well as the subdued oil price environment will continue to weigh on the government's top line. While the government has reaffirmed its commitment to its ambitious infrastructure development targets, expenditure cuts are on the cards, and this could potentially undermine Indonesia's short-term economic growth prospects.
Indonesian President Joko Widodo has managed to consolidate his political position and now enjoys an outright majority in parliament. This has helped him score two major political victories in June (particularly the passage of the tax amnesty bill on June 28), and we believe that policy enactment will continue to improve hereafter.
We believe that the TPP membership would benefit Indonesia over the medium-to-long term as it would broaden market access for Indonesian goods, improve market efficiency by eliminating weak enterprises, encourage more efficient allocation of resources, and promote innovation. However, as Indonesia's currently stands, its manufacturing sector is not yet ready to compete against other TPP nations and joining the TPP could provide a shock to the still-developing industry. Indonesia would likely be better placed to join the TPP after it has improved its industrial competitiveness and scale up its export-oriented manufacturing sector.
Major Forecast Changes
We believe that BI will lower its benchmark interest rate again by an additional 25bps over the coming months as weak government spending could weigh on Indonesia's fledgling growth recovery. The central bank maintained a dovish tone in its official statement, emphasising the need for additional stimulus measures. A fairly stable rupiah and moderate inflation will provide room for additional easing.
Indonesia risks a return to the more polarised political environment witnessed before outgoing President Susilo Bambang Yudhoyono took office in the mid-2000s.
Indonesia's poor net international investment position, along with a current account deficit, makes it vulnerable to periods of acute risk aversion in the global economy. In an environment of rising global interest rates, this is an increasing risk.
|Real GDP growth, % y-o-y||5.0||4.8||5.2||5.7|
|Nominal GDP, USDbn||888.3||861.9||939.8||1,017.3|
|Consumer price inflation, % y-o-y, eop||8.4||3.4||5.0||5.0|
|Exchange rate IDR/USD, eop||12,388.00||13,788.00||13,600.00||14,000.00|
|Budget balance, % of GDP||-2.1||-2.5||-2.7||-2.8|
|Current account balance, % of GDP||-3.1||-2.1||-1.9||-1.4|
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