ADB Cuts Indonesia Growth Forecast, Keeps Medium-Term Optimism

State railway operator is seeking to expand into the real estate sector. (Antara Photo/Yudhi Mahatma)

By : Tabita Diela | on 5:50 PM July 07, 2015
Category : Business, Economy, Featured

Jakarta. The Asian Development Bank has cut its forecast for Indonesia's GDP growth this year to 5 percent from 5.5 percent, after delays in infrastructure spending and fuel subsidy cuts.

The Manila-based bank also revised down its forecast for 2016 to 5.6 percent from 6 percent.

ADB's forecasts are lower than Bank Indonesia projections, which predict the economy will expand 5.1 percent this year and between 5.4 percent and 5.8 percent next year.

"We were very upbeat in January about Indonesia's prospects because of the government's concern for reform," ADB deputy country director for Indonesia, Edimon Ginting, said on Tuesday. "That's the reason we expected 5.5 percent, however, there are things beyond our expectation. First, the growth at the first quarter was far bellow the anticipated level."

Edimon mentioned the delay in budget disbursal and lower-than-expected tax income as the combined cause of the low government contribution to economic growth.

Indonesia's GDP grew 4.7 percent in the January to March period this year, according to the Central Statistics Agency (BPS). It slowed from 5 percent in the fourth quarter of last year and this was the slowest pace since 2009.

'No pain, no gain'

Meanwhile, data from the Finance Ministry showed the government had in the first six months spent only 8 percent, or Rp 23.2 trillion ($1.7 billion), of this year infrastructure budget of Rp 290 trillion.

The government projected tax revenue in the first semester would only reach Rp 555.2 trillion — 37 percent from the target of Rp 1,489 trillion.

Edimon said he appreciated the government's reform efforts, such as the fuel subsidy cuts. However, he said the overall impact of this move had so far only been negative.

“When the government cut the fuel subsidy, bad effects, such as rising prices, came up first. The good impacts, such as better infrastructure, will only surface later," said Edimon.

"Still, we thought: no pain, no gain. The pain will be a gain in the middle-term future."

The ADB still expects the largest economy in Southeast Asia to grow 5.2 to 5.3 percent in the second semester, up from 4.7 to 4.8 percent in the first semester, based on the assumption that the government would disburse the bulk of the infrastructure budget.

In addition, Edimon said lower-than-expected GDP growth in the United States and China would drag Indonesia's economy down further, but a recovering Japanese economy and higher commodity prices may provide some support.

"Don't be too focused on the short-term conditions. Look further at the middle and long-term chances for Indonesia, on which the ADB is still bullish," said Edimon, noting that over the next 10 years Indonesia's economic growth could reach up to 8.7 percent annually.

'Attractiveness undiminished'

Edimon shares the sentiment with Bharat Joshi, a Jakarta-based investment manager at Aberdeen Asset Management, who said the country’s investment attractiveness over the long term remains “undiminished” despite slowing growth in the first quarter.

“While the market is preoccupied with short-term delays in public-works spending, we see great potential over the long term. An urban middle class is already boosting domestic consumption,” Joshi said.

Joshi, who help manage over $4 billion in the country’s equity and bonds, said that the government needs to show steady progress in infrastructure development in order to restore investors’ confidence.

“Investors want to see better transparency and other measures that create a more dependable business environment. A larger industrial sector creates better-paying jobs that underpin income growth and domestic demand,” Joshi said.


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