Why Moody’s Investors Service Cut its Forecast for Indonesia’s Economic Growth?
Global credit rating agency Moody’s Investors Service cut its forecast for economic growth in Indonesia this year from five percent (y/y) to 4.7 percent (y/y) due to the perceived hard landing of China’s economy in combination with sluggish conditions in Japan and the Eurozone. Weak demand from China, the world’s second-largest economy and the top trading partner of Indonesia, is expected to continue to plague Indonesian exports and earnings.
Although Indonesia’s monthly trade balance has been positive since December 2014 there remains plenty of reason for concern as the recent monthly trade surpluses are primarily caused by plunging imports. Meanwhile, the country’s exports have also fallen markedly but at a slower pace. According to the latest data from Statistics Indonesia (BPS), Indonesia’s exports are down 12.8 percent to USD $89.76 billion in the January-July 2015 period compared to the same period last year, while Indonesia’s imports over this period plunged by 25.18 percent (y/y) to USD $84.03 billion. Concern persists as falling imports and exports are a sign that both global economic activity and domestic economic activity are weaker than a year ago.
Weak exports have a negative impact on Indonesia’s gross domestic product (GDP) growth as exports account for approximately 25 percent of the nation’s GDP and hence are partly to blame for Indonesia’s recent economic slowdown. In the second quarter of 2015 Indonesia’s economy grew at its slowest pace in six years (+4.67 percent y/y).
On a positive note, Moody’s remarked that weak imports have a positive impact on Indonesia’s current account deficit which touched worrisome (unsustainable) levels in recent years. In the second quarter of 2015 the country’s current account deficit improved to 2.05 percent of GDP. Moody’s expects that this deficit will remain below three percent in 2015 and 2016.
Apart from weak export performance, Moody’s also cut its forecast for economic growth in Indonesia because of the country’s weakening consumer confidence and the Indonesian government’s limited success to implement programs. Today, the government is expected to announce a new economic policy package aimed at propping up the rupiah and attract foreign capital. However, investors would like to see such programs materialize first before becoming overly enthusiastic.
Economic Growth Forecasts for Indonesia:
| Institution |
2015 | 2016 |
| Moody's Investors Service | 4.7% | 4.7% |
| Indonesian Government | 5.1% | 5.5% |
| World Bank | 4.7% | 5.5% |
| International Monetary Fund | 4.7% | |
| Asian Development Bank | 5.0% | 5.6% |
Various sources