Indonesia’s economic growth is expected to rebound this year as consumers and private investors respond favorably to the government’s public investment and structural reform efforts, says a new report by the Asian Development Bank (ADB).
“Despite global financial market volatility, the wide-ranging economic reforms carried out by President Joko Widodo’s administration have bolstered market confidence and are showing positive results,” said Steven Tabor, ADB’s Country Director for Indonesia.
“It is critical for Indonesia to implement its ambitious public investment program, to deepen and maintain the momentum of these reforms to boost productivity, attract investment, and nurture new sources of growth.”
In its flagship annual economic publication, Asian Development Outlook (ADO) 2016 ADB projects Indonesia’s Gross Domestic Product (GDP) growth to gradually improve from 4.8% in 2015 to 5.2% this year, and to 5.5% in 2017. The forecasts follow 5 years of decelerating growth in Indonesia.
Public investment is projected to increase in 2016, as new infrastructure projects initiated last year gather momentum. Higher public capital spending and ongoing reforms to deregulate the economy will provide additional opportunities for private investment. Household spending is expected to pick up in 2016, while net external demand is not expected to contribute to growth.
Growth in fixed investment increased by 5.1% in 2015 as the government ramped up investment in infrastructure and introduced reforms to revive Indonesia’s appeal for private investors. After a slow start, public investment rose sharply in the second half of the year, when the bulk of the capital investment program was implemented.
The government’s ongoing policy reforms are expected to further stimulate private investment, particularly over the medium-term. The government has unveiled 10 reform packages since September 2015. These, together with higher public capital spending, are steadily improving the country’s investment climate.
Long-term challenges include diversifying economic activity to reduce dependence on a narrow range of commodities. Tabor said this was an important step in the context of fading global appetite for commodities.
“Expanding the manufacturing sector can help, along with a stronger focus on sectors that can deliver strong growth such as tourism, high-value agriculture, marine fisheries, aquaculture, and e-commerce.”
The ADO also notes that the country’s total exports are less than 1% of global trade in goods and services. This highlights the tremendous potential that expanding trade has for boosting demand for Indonesian goods and services, providing that a firm commitment to openness and global competitiveness is maintained.
The ADO recommends that the government push ahead with its deregulation packages, while continuing to remove impediments to private investment. Tabor said reforms should be expanded to address barriers to micro- and small-enterprise development, deepen financial markets, improve land titling and registration, and address labor market rigidities.