Promising Prospects

INDONESIA - Report 30 Dec 2014 by Cyrillus Harinowo and Maria Kartika Purisari

Executive Summary

The short-term volatility in the currency and capital markets notwithstanding, Jokowi’s presidency has created encouraging prospects for Indonesia. The president’s bold November 18th move to cut the oil subsidy has created a large fiscal space that will allow the government to devote funds to more productive purposes.

The plunge in global oil prices to below $60 per barrel will generate even more savings – perhaps double the initially-projected Rp.100 trillion, or as much as $25 billion in savings next year. The government is preparing to devote these funds to agricultural infrastructure development (for dams and irrigation, for example), and transportation, in toll road, rail, port and airport projects. The government, for example, has identified 24 ports to be part of the Sea Toll the president has promised to build.

One major project will be a 2,500-kilometer Trans Sumatra toll road. Unlike the Trans Java toll road, mostly built by the private sector, the Trans Sumatra toll road will likely be built by state-owned enterprises, due to the low feasibility of these projects. And, unlike earlier plans, this is to be undertaken by several state companies, rather than just one. With all these plans at hand, economic prospects look even brighter for the years ahead: we believe Jokowi will eventually achieve his dreamed-of 7% per year GDP growth.

The Central Board of Statistics has readied a change of base year for National Account Statistics, from 2000 to 2010. The number of sectors will also be broadened, from nine to 17. It was indicated that the change in base year would entail an upward revision of the level of GDP. The deputy head of the Board stated that the new GDP in 2010 would be higher by 6.74%, compared to current GDP. If so, Q4 GDP growth is likely to be revised upward.

October trade data showed a minor surplus. Exports increased from $15.276 billion in September to $15.351 billion in October, while imports decreased to $15.328 billion from $15.546 billion. The surplus was a slim $23 million -- but certainly an improvement from the previous month’s $270.3 million.
Inflation was 1.5% in November, significantly below projections, despite the rise in domestic fuel prices. Bank Indonesia therefore decided, during its December meeting, to keep the benchmark rate unchanged, at 7.75%.

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