Opportunities and Risks in Indonesia’s Economic Outlook
    Category: Column By : Haryanto T. Budiman Read : 2347 Date : Friday, February 19, 2016 - 08:03:05

    In December 2015, the U.S. Federal Reserve increased interest rates by 0.25%. While the Fed’s action removed some uncertainty in the market, it will not solve the volatility expected throughout 2016 as a result of depressed commodity prices, turbulence in China’s markets and economy and continued weakness in emerging markets more generally.

    But there are some positives in the global economy. Growth in the U.S. is expected to grow at 2.5% to 3.0% in 2016, which is slightly better than last year. And while the stronger dollar will impact growth, encouraging signs remain with both employment and wages improving steadily. This data, combined with falling gasoline prices, is boosting consumption and the housing market of the world’s largest economy. It’s expected that further tightening by the Fed will be slow with J.P. Morgan forecasting rates to rise to 1.5% by the end of 2016. However, quicker rate hikes may be taken if wage inflation exceeds expectations, which could subsequently impact global markets in the coming months.

    Closer to home, the outlook in ASEAN is one of limited growth during 2016. But as commodity prices have continued to tumble, and the Fed has begun raising rates, constraints surrounding central bank’s ability to make changes to fiscal and monetary policy may have lifted somewhat. Indeed, the Bank of Indonesia opted to cut interest rates by 0.25% during its meeting in January, the first time it had done so since 2012. This was a move aimed at bolstering growth and supporting inflation in Indonesia, which has suffered in the wake of lower commodity prices and weakness in China. In fact, should we continue to see downward pressure on commodity prices, and in particular, oil, we may see more monetary easing in Indonesia through 2016.

    There are signs that Indonesia’s economic growth is stabilizing with reductions in energy subsidies and increased spending on infrastructure having a positive effect. Whilst the disbursement of government investment was slow initially, efforts to speed up spending towards the end of last year brought some good news. In addition, consumption has also begun to stabilize, although exports remain weak.

    A robust recovery requires stronger fiscal action fueled by stronger revenue collection, more efficient disbursement of public spending, and an improved ability to attract portfolio and foreign direct investors. Implementation of recent deregulation packages are being closely monitored by the markets. There is still a lot to be done in 2016 and it requires leadership at all levels and collaboration across different government bodies together with strong political and public support. The momentum must be sustained to drive Indonesia’s future success.