Indonesia's economy may beat expectations, finance minister says

In this picture taken on December 9, 2014, vendors and buyers gather at a fish market in Lampulo village in Banda Aceh, Indonesia, on Tuesday. (Bloomberg/Dimas Ardian)

Indonesia’s finance minister said Southeast Asia’s biggest economy could expand at a faster pace next year than initially forecast.

Economic growth may potentially be boosted by a pickup in investment in 2018, Sri Mulyani Indrawati said in an interview in Jakarta Friday. At the same time, she warned of significant headwinds from "domestic-orientated policies, especially in major countries", such as the flow-through effects of US President Donald Trump’s plans to slash corporate tax rates.

Indonesia’s economy is forecasted to grow by 5.4 percent next year, the fastest pace of expansion in five years, with a budget passed by the parliament last week projecting a narrower deficit and higher tax revenue. Just days after the plan’s approval, Indrawati is already sounding more upbeat.

“The growth rate of 5.4 percent is based on a combination of on the one hand of a pick-up in exports, but with investment that is still a bit conservative,” Indrawati said. “If we assume that investment will pickup, then I think we will have much more upside.”

Indrawati’s optimism comes with some caveats. The economy faces other headwinds from rising interest rates in the US, with the currency coming under pressure in recent weeks. The rupiah has dropped more than three percent against the dollar since reaching a 10-month high in September.

The currency has also fallen as the US president’s tax-cut plan boosted the dollar. The president and Republicans won initial approval from conservative groups at the end of September for a long-awaited plan that would cut corporate tax from 35 percent to 20 percent.

“Of course the announcement by President Trump on tax reform, lowering the rate, is creating again pressure for Indonesia,” Indrawati said. “A race to the bottom is worrying for all because it’s not a win-win game,” she said.

Pause Button

With the Federal Reserve embarking on tightening monetary policy through further rate increases and an unwinding of its balance sheet, Indonesia’s central bank hit the pause button this month after eight rate cuts since the beginning of last year. The full effect of that aggressive run of easing is yet to filter through to the broader economy, Indrawati said.

The transmission of the rate cuts to bank lenders “could be much more efficient,” Indrawati said. “But I think it will come, maybe with a lag of between 12-18 months, meaning the results can only be enjoyed early next year or the middle of next year.”

Despite the central bank’s easing, credit growth has remained lackluster. Bank lending grew 7.86 percent in September from a year earlier, according to Indonesia’s financial services authority, compared with an average growth of more than 10 percent two years ago.

Indrawati, 55, is trying to boost tax revenue and aims to raise the country’s tax-to-GDP ratio from about 11 percent to 16 percent by 2019. A paper supporting amendments to income tax and value-added tax is being prepared, she said, while also warning that Indonesia must be wary of the impact tax cuts would have on revenue.

“The rates will depend on our ability to expand the base because if you lower the rate with the same very narrow and limited tax base, then it would be self-defeating for Indonesia,” she said. “We have to look at it comprehensively."

Indonesia’s economy has been growing about 5 percent, but remains well short of the seven percent target set by President Joko Widodo when he came to power three years ago. A persistent fiscal shortfall has seen the forecast for the 2017 budget deficit trimmed to about 2.7 percent of gross domestic product, compared with the 2.9 percent estimated in July. Indonesia has a legal limit of 3 percent.

The 2018 budget targets a budget deficit of 2.2 percent of GDP next year. Indrawati said the government has a contingency plan in case of a revenue shortfall this year.

While increasing the debt limit has been periodically raised as an option since it was introduced in 2003, Indrawati said tinkering with it “would create less incentive to do the right thing in the real sector.”

“The issue is not about the cap on the deficit. The issue is about whether we have the capacity to design the right program in order for us to create higher growth,” she said. “We believe that we should achieve higher growth that will create more jobs and reduce inequality and poverty." – Bloomberg

Recommended stories: