Growth is projected to pick up gradually next year and reach 5.5% in 2017. Public spending should gather pace, and the impact of the significant fall of the rupiah since early 2014, notwithstanding its a recent strengthening, should provide a boost. Low prices for many primary commodities and regulatory uncertainty will continue to hold back private investment.
While there remains ample room for fiscal support, to date the government has focused primarily on removing obstacles to its infrastructure investment plans. Inconsistent signals regarding protecting domestic industry, openness to foreign investment and free trade are hurting business confidence. A normalisation of monetary policy is constrained by the fall in the currency and its pass-through to inflation.
The almost complete removal of fuel subsidies at the beginning of 2015 was a very positive step. However, the new administrative fuel price-setting regime is still cumbersome. Corruption and lack of enforcement are permitting the illegal clearing and burning of forests, resulting in lower carbon absorption and severe air pollution throughout the region. The government could do more to promote the use of renewables, including tapping Indonesia’s vast geothermal potential.