Brighter Prospects for 2016

INDONESIA - Report 31 Dec 2015 by Cyrillus Harinowo and Maria Kartika Purisari

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As the year comes to a close, we take stock of the main trends of 2015, and make predictions for 2016.

At the beginning of 2015, the Indonesian landscape was mired in major political uncertainty, with the presidential election leaving the new government in a weak position, and dealing with a confrontational and polarizing movement. Public finances were also precarious. The budget had to be revised to reflect the new government’s vision, which left H1 spending at a trickle. The new Joko Widodo administration also reorganized the leadership structure, which further delayed financial administration.

But the government’s grip on the mechanics of power gradually strengthened. It began spending in earnest in May, and made up for lost time. Various infrastructure projects came to fruition, closely monitored by the president himself. In H2, government activities reached their peak, especially toward Q4.

Now various indicators, among them corporate performance, point to optimism, suggesting brighter prospects for 2016.

The trade balance turned in a deficit in November, for the first time this year. Exports reached $11.16 billion, and imports $11.51 billion, leaving a deficit of around $350 million. Of this, non-oil exports were $9.58 billion, a 7.91% fall from October, while non-oil imports were $9.87 billion, up by 5.6%. Yet trade turned in a healthy surplus in annualized terms. The trade deficit, too, reflected the strengthening economy.

The CPI in November was 0.21%, putting y/y inflation at 4.89%, and ytd inflation at 2.37%. This made the Central Bank confident that inflation for 2015 might come in at below 3%, or at least at the low end of the 3% to 5% target range. Therefore, at its December meeting, Bank Indonesia kept the benchmark rate unchanged at 7.5%.

For 2016, the government’s 5.3% growth projection has a stronger likelihood of coming to pass. Though China’s slowdown has hit Indonesian exports, and we think the rebound could still take a few more years to transpire, commodities prices have hit rock bottom: exports are likely to either stagnate or improve from here.Domestic private investment may have better prospects: with the rapid progress of infrastructure, many companies may start expanding and investing, and faster government spending will offer another boost, also giving government a bigger role in the growth engine.