ANALYSIS: Indonesia's domestic economy resilient amid global uncertainties.
Uncertainties over global economic conditions are still having a significant impact on Indonesia's domestic economy this year. They include the possibility of a hike in the US Federal Reserve's Fund Rate, as well as economic deceleration in Europe and China. Stagnant economic development in the EU and Japan are contributing to sluggish trade activity around the world.
International agencies estimated that the growth of global output this year was unchanged from last year, but would be higher in 2017. The World Bank forecast that the growth rate of the global gross domestic product (GDP) would be 2.4 percent in 2016 and 2.8 percent next year and the International Monetary Fund (IMF) predicted the global economy would grow by 3.1 percent year-on-year (yoy) this year and 3.4 percent yoy in 2017.
Indonesia's domestic economy is expected to grow more this year compared to last year. The economy would grow 5 percent in 2016 if supported by strong domestic consumption, improving quality of government spending and also increasing private investment.
From its latest report this month, the World Bank said Indonesia's economy remained resilient against global headwinds, with fiscal management helping to support the country's growth and reduce poverty. Tax collection in the first phase of the tax amnesty totaled Rp 93.4 trillion (US$7.16 billion).
The World Bank predicted the Indonesia's GDP growth would be 5.1 percent in 2016 and 5.3 percent in 2017, while the IMF is aiming for the country to have economic growth of 4.8 percent in 2016 and 5.3 percent in 2017.
In the midst of a complex set of challenges facing the Indonesian economy, both on the external and domestic fronts, Bank Indonesia (BI) and the government have shown a commitment to strengthen coordination in order to maintain macroeconomic stability and promote economic growth.
The government has issued several economic stimulus packages that include deregulation in various sectors to make the real sector perform more smoothly. In line with that, BI continuously makes efforts to maintain stability by providing room for growth. We agree the government has made many efforts to boost growth, especially by focusing on building infrastructure.
The government also launched policies related to the domestic economy, including industrialization of the agricultural sector, enhancing and optimizing investment management, pushing revitalization of the industrial sector, improving infrastructure and logistics networks for primary and supporting commodities, increasing job creation and accelerating poverty reduction.
Since September 2015, the government has made real efforts by issuing 13 economic policy packages. The packages have relatively wide scope, from investment climate improvement to property sector regulation. In general, the policy packages aim to stoke economic activities. In addition, fiscal reforms along with monetary policy loosening are oriented not only to control inflation but also to boost economic growth. The policy rate cut this year is also expected to make a positive impact on growth and investment.
A stronger US dollar backed by expectations of a US interest rate hike is likely to continue until the end of 2016. Domestic money market volatility will increase with a large number of investment portfolios expected to move into the US market. We forecast the average rupiah exchange rate will be from 13,100 to 13,200 per US dollar at the end of 2016.
The current account deficit is expected to improve to an estimated of 2 percent of GDP in 2016. From recent developments, Indonesia posted a monthly trade surplus in September 2016. The domestic trade balance recorded a surplus of $1.21 billion in September 2016, higher than the $363.1 million surplus in August 2016.
The surplus resulted from there being fewer imports than exports. Exports contracted by 1.84 percent month-on-month (mom) in September 2016, affected by an 89.17 percent (mom) reduction in gas supply. Meanwhile, imports contracted 8.78 percent mom because of slower non-oil and gas imports, which contracted by 9.77 percent. The accumulated trade balance surplus (January to September 2016) worth $5.67 billion was lower compared to the same period last year when it was $7.22 billion.
We foresee moderate growth in the upcoming quarter, based on the Mandiri Leading Economic Index (MLEI). The MLEI is composite index for predicting the movement of GDP in the next quarter. It can be useful as an early warning of the movements of Indonesia's economy. According to our MLEI, which is quite representative in describing the movement of GDP, Indonesia's economy is expected to grow slightly higher in 2016, compared with growth in 2015.
Using the quarterly average of the MLEI in the second quarter of this year of 100.3, which is relatively stable compared with average MLEI in the first quarter of 100.1, Mandiri predicts the economy will grow at a moderate pace of about 4.9 percent (yoy) in the third quarter.
Bank Indonesia's business activity survey result also indicated that business activities during the third quarter would not grow as much as in the previous quarter. It is relevant to the historic pattern after Ramadhan and Idul Fitri. Growth decrease is reflected in the weighted net balance (WNB) of 13.2 percent, which is lower than the 18.4 percent recorded during the second quarter. The limited growth of business activity was primarily caused by a slowdown in the processing industry, particularly in the subsector of foods, beverages and tobacco in line with the end of the seasonal factor.
There are still many challenges to be faced by the country. Nevertheless, several external risks will remain as tests of national macroeconomic stability in 2016 and 2017, particularly the escalating volatility of global financial markets that is in line with the possibility of another Fed Funds Rate hike and the downward trend of the global financial market.
Indonesia's economic outlook will continue to be affected by headwinds from the weakening global economy and tightening financial conditions. Several pre-emptive actions should be taken to minimize the risks. We believe that the government's and BI's actions have made positive contributions toward supporting Indonesia's economy going forward.
______________
The writer is a senior quantitative analyst at Bank Mandiri.
-----------------
To receive comprehensive and earlier access to The Jakarta Post print edition, please subscribe to our epaper through iOS' iTunes, Android's Google Play, Blackberry World or Microsoft's Windows Store. Subscription includes free daily editions of The Nation, The Star Malaysia, the Philippine Daily Inquirer and Asia News.
For print subscription, please contact our call center at (+6221) 5360014or [email protected]
Random image that no relation with the story above
Source Here
Random image credited to
