Economic outlook, analysis and forecasts

Indonesia - Economic forecast summary (June 2015)


Economic growth has weakened in recent quarters, but activity is projected to pick up later in 2015 and strengthen further in 2016, as public spending gathers pace, confidence recovers and the expansionary impact of the depreciation of the rupiah takes hold. After spiking, following the removal of fuel subsidies, inflation is now moderating, in large part because of the fall in energy prices. Inflation is likely to stay high, as the recent currency weakness offsets lower energy prices. The exchange rate may remain fragile as the external imbalance persists.

Should the economy decelerate further, there is ample room for fiscal support while respecting the rule that the deficit remains under 3% of GDP. After a ¼ percentage point cut in February, official interest rates are assumed to remain unchanged through 2015 and then fall slightly in 2016. Structural reforms to improve the business environment and the fight against corruption need to continue and are crucial to make growth more inclusive.

Indonesia’s future development is being hobbled by critical infrastructure bottlenecks, particularly in transport and logistics, but also in electricity and water treatment. The abolition of fuel subsidies has provided the necessary fiscal space for increased public infrastructure investment. Accelerating the government’s investment plans, which is a priority, will require overcoming significant political, administrative and implementation impediments.

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