Country Forecast Indonesia January 2018 Updater

Country Forecast Indonesia January 2018 Updater

  • January 2018 •
  • Report ID: 369831 •
  • Format: PDF


  • The president, Joko Widodo (known as Jokowi), will complete his full five-year term in office. He will contest the 2019 election, which he is likely to win. However, he will face a strong challenge from Prabowo Subianto, the leader of the opposition Great Indonesia Movement Party (Gerindra) in the House of Representatives (DPR, the legislature), who lost to Jokowi in the 2014 ballot.
  • Jokowi's administration has been successful in maintaining economic stability and reducing various structural bottlenecks. However, other serious obstacles to productivity, such as stringent labour and local-government laws, which are more politically difficult to tackle, are likely to remain unaddressed.
  • Bank Indonesia (BI, the central bank) has maintained an accommodative monetary policy stance in 2016-17. As the Federal Reserve (the US central bank) continues to tighten monetary policy, BI's ability to maintain its loose policy stance will be increasingly constrained. The Economist Intelligence Unit expects BI to maintain a neutral stance in 2018 and to lift the policy rate in order to shore up the rupiah in 2019.
  • Since May 2017 Indonesia has been classified as "investment grade" by all three major credit rating agencies for the first time since the 1997-98 Asian financial crisis. This status will provide the rupiah with support, helping to limit currency volatility. Nevertheless, we believe that the currency will depreciate by an average of 2.5% a year against the US dollar in 2018-19 as the differential between local and US interest rates narrows, making rupiah-denominated assets less attractive to international investors.
  • Economic growth will remain below potential, owing to the slow pace of structural reforms and subdued global demand growth for commodities, but the government's infrastructure drive should help to keep investment growth relatively stable. Steady increases in private consumption will also remain a key pillar of economic expansion. We forecast that real GDP growth will average 5.1% a year in 2018-22.
  • The current account will remain in the red owing to a large and widening primary income deficit. We expect external borrowing costs to increase in line with monetary policy tightening in the US. The merchandise trade account will stay in the black, but the surplus will remain far below historical highs and too small to offset the deficits on the services and primary income accounts. We forecast that the current-account shortfall will be equivalent to 1.9% of GDP on average in 2018-22.


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