Economic Outlook Points to a Rebound

FEBRUARY 02, 2015

Jakarta. Indonesia’s trade deficit narrowed by more than half last year, bolstering confidence that trade would present less headwinds to the country’s economic rebound on the back of government spending and investment this year.

The country booked $1.8 billion trade deficit in the January to December period last year due to a persistently poor performance of the oil and gas industry, according to a report released by the Central Statistics Agency (BPS) on Monday.

Still, the trade balance has improved significantly compared to 2013’s $4.1 billion deficit, thanks to slower import growth amid a rupiah that had depreciated by 2 percent against the US dollar last year.

indonesia's trade balance

Imports in Indonesia declined by 4 percent Indonesia to $178 billion last year, compared to $187 billion in 2013, according to BPS. In comparison, exports reached $176 billion last year, which is 3.4 percent lower than 2013.

Indonesia has been trying to boost its exports — and hold back imports — to reinvigorate the economy.

President Joko Widodo on Monday summoned on the country’s delegates and ambassadors around the world to focus their diplomacy efforts on boosting the nation’s trade as a way to boost the country’s export, which contributes 22 percent to the economy.

“I asked all our diplomats and ambassadors to focus their diplomacy in economic issues, because our trade is still in deficit; if possible that should be a surplus with our ambassadors actively promoting our products,” Joko told reporters on Monday.

Economists forecast that Indonesia is likely to post growth of between 5.0 percent and 5.1 percent last year and between 5.3 percent and 5.5 percent this year. BPS is set to announce the country’s economic figures on Thursday.

Aldian Taloputra, an economist at Mandiri Sekuritas — who projected that the economy will grow by 5.1 percent in 2014 and 5.3 percent this year — said that government spending, not trade, is expected to encourage economic growth this year.

“The government’s state budget spending seems to be really focused on infrastructure and its plan to inject capital into state-owned enterprises signal that there would be a significant participation from SOEs in the nation’s infrastructure development,” said Aldian.

He also said he’s currently reviewing the forecast in anticipation of higher growth this year, awaiting the government’s implementation of its infrastructure investments.

Investments makes up 31 percent of the country’s economy. The investment coordinating board has said that it aims to book Rp 519.5 trillion ($40.9 billion) in investments this year, or 12 percent higher than Rp 463.1 trillion in 2014, with Rp 175.8 trillion from domestic investments.

Gundy Cahyadi, an economist at Singapore’s DBS Bank, shared a similar sentiment as Aldian, noting that “the key difference for 2015 will come from an accelerated fiscal spending expected this year. In the revised 2015 budget, government’s capital expenditure will make up about 21 percent of the overall government budget, highest in more than 10 years,” he said.

The government is slated to spend as much as Rp 290 trillion in infrastructure this year, according to the draft of the revised state budget.

This compared to Rp 196 trillion budgeted in the original state budget for 2015 which was approved by the previous administration of Susilo Bambang Yuhoyono last year.

Both Aldian and Gundy also noted that the country’s central bank, Bank Indonesia, is likely to lower its benchmark interest rate this year as inflation has decelerated and trade deficit is narrowing.  And that should drive companies to invest more in their business expansion.

inflation breakdown

Indonesia’s inflation rate eased to 6.96 percent year-on-year compared to 8.36 percent in December last year on lower transportation prices, following the government’s move to reduce fuel price amidst lower oil prices globally, according to BPS.

Core inflation — which excludes prices of food and fuel due to their volatility — picked up to 4.99 percent in January, compared to 4.93 percent in December last year.

Slower inflation rate is a positive indicator to Indonesia’s economy as it’s would mean higher household spending, which makes up over 50 percent of the economy.

“Private consumption growth is unlikely to provide any further support to overall GDP growth than what it already did in recent years,” said Gundy.

“What does this means for rate policy trajectory? Well, the risks of a BI rate cut are increasingly high although it remains to be seen if the central bank wants to move at this juncture,” he said.

Earlier in November, Bank Indonesia increased its policy rate by 25 basis points to 7.75 percent in attempt to anchor expected inflation in the country after the government raised fuel prices by an average of 30 percent last year.