Bank Indonesia Cuts 2016 Forecast Economic Growth Indonesia, Keeps High BI Rate
For the second time, the central bank of Indonesia (Bank Indonesia) cut its 2016 forecast for economic growth in Indonesia, Southeast Asia’s largest economy. Due to persistent low commodity prices and weak export figures, the central bank now estimates that Indonesia’s economy will grow in the range of 5.2 - 5.6 percent (y/y) next year, down from its earlier outlook of 5.3 - 5.7 percent and the initial outlook of 5.4 - 5.8 percent.
On Tuesday (15/09), the Indonesian government and the House of Representatives (DPR) discussed the country’s 2016 macroeconomic assumptions and 2016 State Budget. At this occasion Bank Indonesia Governor Agus Martowardojo revealed the central bank’s new GDP growth prognosis for 2016 (5.2 - 5.6 percent year-on-year).
Regarding full-year growth in 2015, Bank Indonesia expects to see a growth pace in the range of 4.7 - 5.1 percent (y/y), down from an earlier projection of 5.0 - 5.4 percent (y/y). Martowardojo added that Bank Indonesia expects economic growth to accelerate in this year's third and fourth quarters on improved government spending and infrastructure development. In the first half of 2015 government spending and government-led infrastructure development had been weak.
In the second quarter of 2015, Indonesia’s GDP growth slowed to the six-year low of 4.67 percent (y/y) amid external turmoil (low commodity prices, China’s economic slowdown, and looming monetary tightening in the USA) and internal factors (high inflation, declining purchasing power, and the central bank’s high interest rate).
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
| Year | Quarter I |
Quarter II | Quarter III | Quarter IV |
| 2015 | 4.72 | 4.67 | ||
| 2014 | 5.14 | 5.03 | 4.92 | 5.01 |
| 2013 | 6.03 | 5.81 | 5.62 | 5.72 |
| 2012 | 6.29 | 6.36 | 6.17 | 6.11 |
| 2011 | 6.45 | 6.52 | 6.49 | 6.50 |
| 2010 | 5.99 | 6.29 | 5.81 | 6.81 |
| 2009 | 4.60 | 4.37 | 4.31 | 4.58 |
Source: Statistics Indonesia (BPS)
The relatively high interest rate environment is partly to blame for reduced economic growth in Indonesia. The central bank’s key interest rate (BI rate) has been at 7.50 percent since February 2015, hence curtailing credit growth. Bank Indonesia maintains a tight monetary policy stance in an effort to combat high inflation (7.18 percent y/y in August), reduce the country’s wide current account deficit and support the rupiah (which has weakened around 16 percent against the US dollar since the start of the year). The central bank said it wants inflation to ease before considering an interest rate cut.
Inflation in Indonesia:
| Month | Monthly Growth 2013 |
Monthly Growth 2014 |
Monthly Growth 2015 |
| January | 1.03% | 1.07% | -0.24% |
| February | 0.75% | 0.26% | -0.36% |
| March | 0.63% | 0.08% | 0.17% |
| April | -0.10% | -0.02% | 0.36% |
| May | -0.03% | 0.16% | 0.50% |
| June | 1.03% | 0.43% | 0.54% |
| July | 3.29% | 0.93% | 0.93% |
| August | 1.12% | 0.47% | 0.39% |
| September | -0.35% | 0.27% | |
| October | 0.09% | 0.47% | |
| November | 0.12% | 1.50% | |
| December | 0.55% | 2.46% | |
| Total | 8.38% | 8.36% | 2.29% |
Source: Statistics Indonesia (BPS)
Inflation in Indonesia 2008-2014:
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
| Inflation (annual percent change) |
9.8 | 4.8 | 5.1 | 5.4 | 4.3 | 8.4 | 8.4 |
Source: World Bank