The Institute for Development of Economics and Finance (Indef) argues that economic development that has occurred during the first two years of the government under the leadership of President Joko Widodo is too much centered on the island of Java, Indonesia's most populous island and the political and economic center of Southeast Asia's largest economy. Java, particularly the Greater Jakarta region, contributes about 60 percent to the total Indonesian economy.

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Regional development bank Asian Development Bank (ADB) has become slightly less optimistic about Indonesia's economic growth in the years 2016 and 2017, although the Manila-based institution emphasizes that Southeast Asia's largest economy remains growing at a healthy pace. In its latest Asian Development Outlook 2016 the ADB cut its forecast for Indonesia's economic growth to 5.0 percent (y/y) in 2016 (from 5.2 percent previously) and to 5.1 percent (y/y) in 2017 (from 5.5 percent previously).

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Indonesian entrepreneurs say their credit demand is limited due to few expansion and investment plans ahead of the end of the year. Although the Indonesian economy is recovering - reflected by accelerated GDP growth figures in the first two quarters of the year - demand from abroad for Indonesian products remains weak, while domestic demand remains somewhat subdued as well (reflected by the nation's structurally weakening export and import figures over the past 15 months). As a result credit growth has been slowing accordingly.

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There is plenty of room for optimism about the direction of Indonesia's economic growth this year. Indonesia's Statistics Agency (BPS) announced on Friday (05/08) that the economy of Southeast Asia's largest economy expanded by 5.18 percent (y/y) in the second quarter of 2016, a figure that exceeded all expectations and forms a remarkable jump from the 4.66 percent (y/y) GDP growth figure in Q2-2015 and 4.91 percent (y/y) in Q1-2016. As a result, Indonesia's benchmark Jakarta Composite Index is currently near record levels.

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Direct investment in Indonesia (both domestic and foreign) totaled IDR 298.1 trillion in the first half of 2016, up 14.8 percent from investment realization in the same period one year earlier. Foreign direct investment (FDI) was recorded at IDR 195.5 trillion¹, up 12.3 percent (y/y) - and accounting for 65.6 percent of total investment realization in the first six months of 2016 - while domestic direct investment (DDI) rose 20.0 percent (y/y) over the same period. On a quarter-to-quarter basis, FDI into Indonesia rose 7.9 percent, considerably lower than the 17.1 percent (q/q) growth pace in the preceding quarter.

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The World Bank released the June 2016 edition of its Indonesia Economic Quarterly (IEQ) report on Monday (20/06). Recently, the Washington-based institution took a rigorous step by downgrading its 2016 global economic growth forecast from 2.9 percent (y/y) to 2.4 percent (y/y). This is a significant downgrade that was primarily due to the weak performance of commodity exporters. Despite this downgrade the World Bank still sees a resilient Indonesian economy, reflected by a GDP growth forecast of 5.1 percent (y/y) in 2016 and 5.3 percent (y/y) in 2017.

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In line with expectations, the government of Indonesia revised down its economic growth target in 2016 from 5.3 percent (y/y) to 5.1 percent (y/y) amid subdued private consumption, slower-than-expected private investment, and low commodity prices. Meanwhile, the World Bank also cut its forecast for Indonesia's economic growth in 2016 to 5.1 percent (y/y), down from its earlier prediction of 5.3 percent (y/y). The World Bank also slashed its outlook for global growth from 2.9 percent (y/y) to 2.4 percent (y/y) this year.

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Investors from South Korea plan to invest up to USD $18 billion in Indonesia. Indonesian President Joko Widodo, Chairman of the Chamber of Commerce & Industry (Kadin) Rosan Perkasa Roeslani, Trade Minister Thomas Lembong and Foreign Minister Retno Marsudi witnessed the signing of business agreements and memorandums of understanding (MoU) in Seoul on Monday (16/05), covering bilateral cooperation in infrastructure development such as power plants, gas pipelines and railways as well as trade, creative economy, environment, and maritime affairs.

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Efforts to raise people's purchasing power and household consumption in Indonesia will be key to push for higher economic growth in 2016. According to the latest data from Statistics Indonesia (BPS), Indonesia's gross domestic product (GDP) growth reached 4.92 percent (y/y) in the first quarter of 2016. Although this result failed to meet analysts' projections (which generally stood around 5 percent y/y), it was higher than the 4.73 percent (y/y) economic growth pace that was posted in the same quarter one year earlier.

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Economic growth of Indonesia was weaker-than-estimated in the first quarter of 2016. According to the latest data from Statistics Indonesia (BPS), released today (04/05), Indonesia's gross domestic product (GDP) growth reached 4.92 percent (y/y) in Q1-2016. Most analysts expected to see a GDP growth pace slightly above the 5 percent (y/y) mark and therefore the publication of BPS was disappointing and raises questions whether Indonesia's economic growth can in fact accelerate significantly in 2016.

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After Indonesia’s political year of 2014 ended, financial institutions expect to experience better times in 2015. Last year, economic growth of Indonesia slowed to a five-year low of 5.02 percent (y/y) due to weak exports, the high domestic interest rate environment, and political uncertainties caused by Indonesia’s legislative and presidential elections. This year, however, economic growth is expected to accelerate - albeit slightly - implying stronger purchasing power. One of the businesses that will profit is mutual fund management.

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At the Indonesia Investment Summit 2015, organized in Jakarta on 15-16 January 2015, Bank Indonesia official Arief Mahmud presented several views of the central bank on the current Indonesian economy and the global and domestic challenges that it faces. As is widely known, Indonesia has been experiencing a process of slowing economic growth since 2011 due to sluggish global economic growth in combination with the rebalancing of the domestic economy. However, growth is expected to accelerate in 2015.

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The Indonesian government admits that it is difficult to achieve the 5.5 percent gross domestic product (GDP) growth target that was set in the Revised 2014 State Budget (APBN-P 2014). In fact, Deputy Finance Minister Bambang Brodjonegoro stated that Southeast Asia’s largest economy will have to work hard to reach +5.3 percentage point GDP growth this year. “We have to be realistic. Hopefully GDP growth will improve in the second half of 2014 to a level of 5.3 percent. The current forecast for GDP growth in 2014 is 5.2-5.3 percent,” he said.

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On Monday (23/06), the World Bank released its latest analysis regarding the Indonesian economy. In its report, titled ‘Indonesia: Avoiding the Trap’, the World Bank states that Indonesia needs to implement a six reforms in priority areas in order to avoid the so-called middle income trap (referring to the situation where a country gets stuck at a certain income level). Without these critical reforms, the country’s economic growth will slow and may not be able to escape the middle income trap.

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Chairman of Indonesia's Chamber of Commerce and Industry (Kadin) Suryo Bambang Sulisto stated that the most crucial problem which Indonesia is facing currently as well as in the foreseeable future is unemployment. Sulisto said that while the population of Indonesia has grown continuously in the past decade, unaffected by family planning programs, employment opportunities have not grown accordingly. In fact, they have declined. At end-2013, Indonesia's unemployment rate stood at 6.3 percent (of the total labor force).

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The Indonesia Investment Coordinating Board (BKPM) said that total realized investments in Indonesia in the third quarter of 2013 was recorded at IDR 100.5 trillion (USD $8.89 billion). Of this total figure, IDR 67.0 trillion (USD $5.93 billion) was accounted for by foreign direct investment (FDI), while the remainder (IDR 33.5 trillion) was classified as domestic direct investment (DDI). The total investment realization of IDR 100.5 trillion was the highest ever quarterly investment figure since the BKPM releases these quarterly results.

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The slowdown of Indonesia's economic growth is expected to continue into the third quarter of 2013. The Indonesian government predicts that economic growth will fall below the GDP growth figure realized in the second quarter (5.8 percent). Acting Head of the Fiscal Policy Agency Bambang Brodjonegoro stated that the main factor that causes the country's slowing economic growth in Q3-2013 is reduced household consumption. Domestic consumption in Indonesia accounts for about 55 percent of the country's GDP growth.

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Growth of Gross Fixed Capital Formation (GFCF) in Indonesia has continued to slow down in the first six months of 2013. In the first quarter of 2013, GFCF rose 5.78 percent but in the second quarter the pace fell to 4.67 percent. These results are much lower than last year's quarterly growth rates as can be seen in the table below. In fact, the growth rate in Q2-2013 constitutes the lowest growth rate in the last 13 quarters. In Q2-2013, all sectors experienced weakening investments except for domestic machinery and equipment.

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Investment realization in Indonesia grew 30.2 percent to IDR 192.8 trillion (USD $19.8 billion) in the first six months of 2013 (compared to the same period last year). This result implies that 49.4 percent of the investment target for full 2013 has been achieved. The Indonesia Investment Coordinating Board (BKPM) aims to collect IDR 390.3 trillion in investments this year. This target is divided in domestic direct investment (DDI) of IDR 117.7 trillion and foreign direct investment (FDI) of IDR 272.6 trillion.

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Indonesia's central bank (Bank Indonesia) expects that economic growth of Indonesia in 2013 will not meet the government's target as has been set in the revised State Budget (APNB-P). Last month, both government and parliament of Indonesia agreed on a revised GDP growth assumption of 6.3 percent. However, Bank Indonesia believes that, due to slowing domestic consumption and investments in the current global economic context, the growth is more likely to fall between 5.8 and 6.2 percent.

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