Indonesia's budget deficit as a share of GDP will likely deepen further to 2.5% in 2016, from our forecast of 2.3% in 2015, due to higher developmental expenditures and lower-than-projected revenue realisation. This could potentially exert upside pressure on Indonesia's sovereign bond yields over the coming quarters as the government will have to tap on the bond market to finance its revenue shortfall.
Bank Indonesia will likely ease its monetary policy over the coming months once it has assessed the market's reaction to the Federal Fund Rate (FFR) hike and confirmed the downtrend in inflation. However, the central bank is likely to remain relatively cautious given ongoing volatility in the rupiah, and we expect a relatively shallow rate cutting cycle of 50bps.
We remain bearish on the Indonesian rupiah over the short and medium term, and expect the currency to weaken further to IDR14,600/USD by end-2016 and IDR14,800/USD by end-2017. Over the course of 2016, weak economic growth momentum, external headwinds and diverging monetary policies will likely continue to undermine the rupiah.
Although the pro-reform Jokowi administration has been actively trying to reduce bureaucratic red tape and boost investor confidence, political infighting due to vested interest and nationalistic sentiment among the political elites have hampered the progress and efficacy of these positive developments. This will likely act as a drag on the country's economic recovery over the coming year; as such, we maintain our forecast for Indonesia's economy to accelerate only moderately in 2016, with a forecasted real GDP expansion of 5.2%.
Major Forecast Changes
Indonesia's real GDP growth will pick up over the coming quarters on the back of stronger investment and government spending, but persistent domestic and external headwinds will likely cap upside potential. As such, we have downgraded Indonesia's real GDP growth forecast for 2016 to 5.2%, from 5.6% previously.
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||5.1||4.8||5.2||6.0|
|Nominal GDP, USDbn||888.3||878.1||907.1||981.9|
|Consumer price inflation, % y-o-y, eop||8.4||4.5||5.0||5.0|
|Exchange rate IDR/USD, eop||12,388.00||14,000.00||14,600.00||14,800.00|
|Budget balance, % of GDP||-2.2||-2.3||-2.5||-2.9|
|Current account balance, % of GDP||-3.1||-2.5||-1.7||-0.8|
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