GDP in Focus: Analysis of Indonesia's 5.04% Economic Growth in Q4-2015

Indonesia's economic growth accelerated in Q4-2015 despite household consumption - the traditional pillar of Indonesia's economic growth (accounting for nearly 56 percent of the country's overall growth) - slightly weakening. Household consumption eased to a growth pace of 4.92 percent (y/y) in Q4-2015, down from 4.95 percent (y/y) in the preceding quarter. Regarding full-year 2015, Indonesia's household consumption expanded 4.96 percent (y/y), the slowest pace in four years.

Indonesia has a population that numbers over 250 million people and with solid economic growth over the past decade the country's middle class segment has expanded rapidly meaning that more and more people consume a widening range of (more expensive) products and services. This consumer force is still the main pillar of support for Indonesia's economic growth. However, household consumption in 2015 eased further as Bank Indonesia remained committed to its high interest rate regime (with the benchmark BI rate at 7.50 percent during most months in 2015), while inflation remained persistently high until late-2015 due to subsidized fuel price reforms conducted by the government in 2013, 2014 and early 2015. Moreover, the Indonesian rupiah has weakened significantly against the US dollar since mid-2013 when the US Federal Reserve started to hint at withdrawing its accomodative monetary policy (a weak rupiah makes imports of raw materials for Indonesia's manufacturing industry more expensive), while commodity prices went further downhill due to the economic slowdown of China, Indonesia's key trading partner (commodities are an important foreign exchange earner for Indonesia). All in all, this managed to curtail consumer confidence and the purchasing power of the Indonesian people, and therefore growth of household consumption slowed in 2015.

Indonesia's Quarterly GDP Growth in 2015 (annual % change):

Growth Source	Quarter I	Quarter II	Quarter III	Quarter IV
Household Consumption	5.01	4.97	4.95	4.92
Government Spending	2.71	2.28	7.11	7.31
Gross Fixed Capital Formation	4.29	3.55	4.79	6.90
Export	-0.85	-0.13	-0.60	-6.44
Minus Import	-2.27	-6.85	-5.90	-8.05
Total	4.71	4.66	4.74	5.04

^{Source: Statistics Indonesia (BPS)}

Indonesia's GDP Growth per Component 2012 - 2015 (annual % change):

Growth Source	2012	2013	2014	2015
Household Consumption	5.28	5.28	5.14	4.96
Government Spending	1.25	4.87	1.98	5.38
Gross Fixed Capital Formation	9.81	4.71	4.12	5.07
Export	2.01	5.30	1.02	-1.97
Minus Import	6.65	1.21	2.19	-5.84
Total	6.23	5.56	5.02	4.79

^{Source: Statistics Indonesia (BPS)}

So, if Indonesia's main pillar of economic growth - household consumption growth - slightly slowed, what caused the nation's overall economic growth to accelerate in Q4-2015? There are two answers to this question: government spending and gross fixed capital formation.

Government spending expanded 7.31 percent (y/y) in Q4-2015, up from 7.11 percent (y/y) in the preceding quarter. Meanwhile, gross fixed capital formation grew 6.90 percent (y/y) in Q4-2015 from a growth pace of 4.79 percent (y/y) in the preceding quarter. Both these components are primarily supported by government efforts to enhance infrastructure development across Indonesia. Starting from the second half of 2015 we detected the groundbreaking of more and more infrastructure projects (such as power plants, toll roads, smelters, bridges and railways). Some of these projects are (partially) financed by the central or local government while others are (fully) financed by private investors. Also in case the government will not contribute financially to the project it has increased efforts to smoothen the realization of these projects (for example by assisting the private investor during the land acquisition process).

Starting in September 2015 the Indonesian government has also been unveiling a series of economic stimulus packages that particularly aim to boost the country's manufacturing industry (in a bid to reduce the country's dependence on commodity exports) through the offering of tax incentives and deregulation. Although it is good that the Indonesian government raises efforts to support growth in the manufacturing industry, the country still has to cope with a weak track record regarding the effective implementation of reforms and therefore it remains to be seen whether these packages will bear fruit. If implemented effectively and fully, then these packages should support economic growth in 2016.

Economic Stimulus Packages of the Indonesian Government:

Package	Unveiled	Main Points
1st	9 September 2015	• Boost industrial competitiveness through deregulation • Curtail red tape • Enhance law enforcement & business certainty
2nd	30 September 2015	• Interest rate tax cuts for exporters • Speed up investment licensing for investment in industrial estates • Relaxation import taxes on capital goods in industrial estates & aviation
3rd	7 October 2015	• Cut energy tariffs for labor-intensive industries
4th	15 October 2015	• Fixed formula to determine increases in labor wages • Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
5th	22 October 2015	• Tax incentive for asset revaluation • Scrap double taxation on real estate investment trusts • Deregulation in Islamic banking
6th	5 November 2015	• Tax incentives for investment in special economic zones
7th	4 December 2015	• Waive income tax for workers in the nation's labor-intensive industries • Free leasehold certificates for street vendors operating in 34 state-owned designated areas
8th	21 December 2015	• Scrap income tax for 21 categories of airplane spare parts • Incentives for the development of oil refineries by the private sector • One-map policy to harmonize the utilization of land
9th	27 January 2016	• Single billing system for port services conducted by SOEs • Integrate National Single Window system with 'inaportnet' system • Mandatory use of Indonesian rupiah for payments related to transportation activities • Remove price difference between private commercial and state postal services

^{Source: Indonesia Investments}

In 2016 we expect to see accelerating economic growth in Indonesia. In line with forecasts of the World Bank, International Monetary Fund (IMF), Bank Indonesia as well as the target of the Indonesian government set in the 2016 State Budget, we expect to see a GDP growth rate around 5.3 percent (y/y), particularly if the government remains committed to spending realization and will force the full implementation of the aforementioned stimulus packages. Furthermore, Bank Indonesia may cut its BI rate further in 2016. At its January 2016 policy meeting Indonesia's central bank had already cut the BI rate by 25 basis points to 7.25 percent hence providing more room for credit expansion in Southeast Asia's largest economy. Although China's hard landing remains a major challenge, Indonesia's promising quarterly GDP growth results in the third and fourth quarter of 2015 show that Indonesia can manage to accelerate economic growth amid an unconducive global environment provided that the government continues to step up efforts to boost infrastructure development and attract investment in the manufacturing industry.

Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV	Full-Year
2015	4.72	4.67	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	6.2
2010	5.99	6.29	5.81	6.81	6.4
2009	4.60	4.37	4.31	4.58	4.6

^{Source: Statistics Indonesia (BPS)}

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