Emerging Market : Indonesia Growth Target

Not So Fast: Why Indonesia Could Miss Growth Target in 2015

by Andrew Janes

http://www.bloomberg.com/news/articles/2015-02-03/not-so-fast-why-indonesia-could-miss-widodo-s-2015-growth-goal?hootPostID=926458c71835f4370b3156be36c64991

 

(Bloomberg) — Indonesian President Joko Widodo says Southeast Asia’s biggest economy can achieve the official growth target of 5.7 percent this year. That could be a taller order than he anticipates.Widodo, who took office in October, inherited an economy fettered by years of under-investment in infrastructure, plunging commodity prices and the withdrawal of U.S. monetary stimulus. The central bank has kept monetary policy tight to protect a vulnerable rupiah and gross domestic product probably grew 4.9 percent last quarter from a year earlier, the slowest pace since 2009, according to a Bloomberg survey.

The president, known as Jokowi, is promising to rev things up by fast-tracking large road, port and power projects and cutting red tape. He’s seeking to woo investment and boost non-commodity exports, targeting an expansion of as much as 6.3 percent to 6.9 percent next year.

“We are confident to have the target of our economic growth” of 5.7 percent this year, the president said in a Feb. 2 interview in Jakarta. “But we must increase our exports volume and we must reform our bureaucracy. We must invite FDI.”

Yet the World Bank sees Indonesia growing 5.2 percent this year and 5.5 percent in 2016. The economy probably expanded 5.06 percent in 2014, according to a Bloomberg survey ahead of data due Feb. 5 in Jakarta. Here are five things that could stand in the way of Indonesia’s growth goal for this year.

Commodity Prices

The prices of Indonesia’s key commodity exports may not recover anytime soon. Coal has fallen further this year and has now more than halved in price since the end of 2010. Palm oil capped the biggest January decline since 2010 as demand weakens amid a supply glut, after slumping 16 percent in the past year.

While the plummeting price of crude presented Jokowi with an opportunity to scrap gasoline subsidies, it will also sap government revenue.

The state will lose about 158.8 trillion ($13 billion) of revenue because of the drop in oil prices, according to a Nomura Holdings Inc. research note last week by economists including Euben Paracuelles in Singapore. That negates much of the 230 trillion rupiah of budget funds freed up by the fuel subsidy overhaul.

Sticky Deficit

Indonesia was dubbed one of the fragile five emerging-market economies by Morgan Stanley in 2013 because its large external deficit made it vulnerable to capital outflows. While the shortfall in the current account has narrowed from a record 4.4 percent of gross domestic product in the second quarter of that year, Bank Indonesia is forecasting a deficit of 3 percent to 3.5 percent of GDP this year, compared with an estimate for about 3 percent in 2014.

The big infrastructure projects being promised by Jokowi could spur imports, putting pressure on the balance, according to Ndiame Diop, the World Bank’s lead economist for Indonesia. This persistent deficit makes it more difficult for Bank Indonesia to follow global peers in cutting borrowing costs to bolster economic growth.

Standard Chartered Plc said most of its Indonesian clients see the central bank holding or increasing its policy rate in 2015, according to a note released Feb. 3.

Implementation Risks

The stand-off between Indonesia’s police force and its anti-corruption agency, the KPK, has dominated local media in recent weeks. A failure by the president to show strong leadership could undermine his credibility for pushing ahead with economic reforms and cracking down on graft.

“There could be a rippling effect,” the World Bank’s Diop says. He also points out that about 50 percent of the central government budget is actually managed by sub-national governments, raising the possibility that the implementation of infrastructure and social spending will be slower than expected because of the difficulty in transmitting policy from the top.

Global Risk

The global economy is unlikely to provide much support to Indonesia this year, with weaknesses in Japan, Europe and China, Indonesia’s largest export market. Meanwhile, a recovery in the U.S. is forecast to prompt the Federal Reserve to raise interest rates, reducing the appeal of higher-yielding assets in emerging markets like Indonesia.

“This is going to be a very tough year externally,” Mari Pangestu, a former Indonesian trade minister, said in an interview with Bloomberg Television on Wednesday.

A strengthening U.S. economy and slowing growth in China is a “bad combination” for Indonesia as commodity prices will probably keep falling, said Benedict Bingham, the International Monetary Fund’s senior resident representative in Jakarta.

Time Lag

The economic overhaul being promised by Jokowi could take time to benefit the economy. Large infrastructure projects may take a while and the goal of lifting non-commodity exports is dependent on increasing the supply of skilled labor.

“Whether we can actually roll out the infrastructure projects fast enough is really the big question mark,” said Pangestu. “The concern is about implementation.”

The government also needs to review its trade and labor policies, which look more defensive rather than focused on winning global market share, according to Bingham.

“2015 needs to be seen as a year in which the foundations for the medium-term strategy are set,” he said. “It’s not going to be a year where the pay-off from this strategy is going to become immediately apparent.”

 

Advertisement

Stronger dollar and higher rates

Fed rate normalisation

Most analysts are forecasting an increase in fed fund rate and tightening of US monetary conditions, perhaps by second half of 2015. This move will impact  Asian countries, being the large recipients of QE flows and thus vulnerable to sudden stops in the flow.

Further to this, China slower growth and weak imports, as opposed to US’ stronger import would dampen Asia’s export recovery.

Data from Bank of America Merrill Lynch

 Look where Malaysia is?

On the eastern side, Abenomics have failed to achieve the objectives (the three arrows) and Japan is thus likely to be in deflationary state. With the current state of low oil price, Japan as net energy importer would benefit from it, and BOJ has thus lowered its CPI forecast to 1% which has suggested that further monetary easing would be necessary. Subsequent to this yen is expected to go lower to 130 by year end (source: ABN Amro) and putting downward pressure on prices which in turns may delay their inflation target this year.

US is certainly benefiting from potential rate hike and stronger dollar. As we can see in the recent years there is a continuous upbeat in the US economy.

Certainly there are many more areas to look at, Malaysia for example as the exporter of oil impacted by the fell in oil price which has prompted the government to revise its 2015 budget. Greece crisis and Eurozone issues at large are another angle to look at which certainly have impacts on the global growth this year. On the other hand, Indonesia, India and Philippines are enjoying growth and positive outlook, stemming particularly from the policy revision, rebound in government spending and fiscal reduction pledge by their respective governments.