Economic Growth Indonesia in 2016? Key Lies in Regions

The central government decided to cut government spending by IDR 137.6 trillion (approx. USD $10.4 billion) for the remainder of 2016 in order to combat a widening budget deficit (caused primarily by weaker-than-targeted tax revenue). This means that the government has less funds to boost economic growth. Indonesia's Chief Economics Minister Darmin Nasution remains optimistic, however, that the 5.2 percent (y/y) economic growth target (set in the Revised 2016 State Budget) can be achieved as there are still several government investment projects that were approved last year but will see groundbreaking before the end of 2016 (for example projects related to the government's ambitious 35,000 MW power program).

Moreover, given Indonesia's low inflation rate (2.79 percent y/y in August 2016), Indonesia's household consumption should improve in the remainder of the year. If household consumption improves it will surely have a major impact on overall economic growth because household consumption accounts for around 57 percent of the nation's total economic growth.

However, most international and domestic institutions (including the central bank of Indonesia) see Indonesia's economic growth pace in the range of 4.9 - 5.1 percent (y/y) in 2016, particularly as the global outlook remains bleak.

Key to Accelerated Economic Growth Lies in the Regions

The key to unlock accelerated and long-term/structural economic growth in Indonesia lies in the regions. Perry Warjiyo, Deputy Governor of Indonesia's central bank (Bank Indonesia), says the regional governments need to push for a change in the local economic structure, reducing the reliance on commodity (exports) and start to focus on the development of new and promising sectors such as the maritime and tourism sectors. Reliance on volatile commodity prices is too risky, particularly when commodity prices touch multi-year lows as is the case now.

Warjiyo says there are four matters that need to be conducted by the central and regional authorities in Indonesia in order to create new sources of growth. These are (1) push for the development of downstream industries for the nation's natural resources (hence Indonesia can become an exporter of products that are positioned higher up in the value chain), (2) diversify the nation's maritime, agribusiness, and tourism sectors, (3) make the country's investment climate more attractive for investors, and (4) focus on infrastructure development.

Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV	Full-Year
2016	4.91	5.18
2015	4.73	4.66	4.74	5.04	4.8
2014	5.14	5.03	4.92	5.01	5.0
2013	6.03	5.81	5.62	5.72	5.6
2012	6.29	6.36	6.17	6.11	6.0
2011	6.45	6.52	6.49	6.50	6.4
2010	5.99	6.29	5.81	6.81	6.2
2009	4.60	4.37	4.31	4.58	4.6

^{Source: Statistics Indonesia (BPS)}

In the post-Suharto era, decentralization has given rise to powerful regional governments in terms of policy-making. This change of course was needed to reduce feelings of resentment in the regions toward the central government in Jakarta. As such, on the one hand it has strengthened the unity of Indonesia. But on the other hand, it meant that uniform policy-making and implementation throughout the archipelago is very difficult. Good coordination and cooperation between the central and regional authorities is difficult as both sides sometimes have conflicting interests, while human resources at the regional level are generally of low quality.

Since September 2015 the Indonesian government has launched a series of economic policy packages in which deregulation plays a key role. However, Indonesia's Chamber of Commerce and Industry (Kadin) recently stated that Indonesia's regional governments have issued new regulations that actually undermine the policies set within the recent economic policy packages, the underlying reason being that local governments fear declining revenues if they adjust local regulations to the central policies, or, that the local authorities will benefit less from the new central policies compared to the central authorities. Deregulation implies that thousands of regulations are scrapped (as they were considered to undermine the attractiveness of the investment climate) and for local government officials this means that they have less opportunities to earn some additional money from investors (it is a usual phenomenon in Indonesia that government officials request some small additional money for each action they undertake during the permitting process).

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