Widodo seems serious about moving the capital
The issue of moving the capital city out of Java has been alive for more than half a century, since Indonesia’s first president, Ir. Soekarno, promoted an idea of moving the capital to Palangkaraya, the capital of Central Kalimantan province on Borneo. So when President Joko Widodo raised the same idea some time ago, it was interpreted as a revival of Soekarno’s idea. But unlike the first president, Widodo has followed up with concrete measures, especially by assigning the minister of planning to lead the execution of follow-up steps.
In an August speech to Parliament on the eve of the anniversary of Indonesian independence, Widodo marked another milestone, by proposing the plan to Parliament and other Indonesian leaders, to ask for their backing for the plan. He clearly indicated that the plan would involve a large amount of money, but committed to not using much of the state budget. The funds to build the new capital are to be raised by the private sector, via private agents’ own creative efforts. This seems to be a workable plan.
The Indonesian economy is in good shape. New national accounts data shows that in Q2, the economy grew by 5.05%. Though that’s slightly lower than in Q1, it’s an encouraging rate, when seen in global terms. The balance of payments is deteriorating, though it may not be entirely on the downward trend, since Q2 usually shows a pattern of negative balance of payments, due to the payments of dividends, and to higher imports linked to the Muslim holidays. For the spike in imports, the trend will shift, since every year the holidays move forward by around two weeks.
The current account deteriorated considerably in Q2 from the previous quarter. In Q1, the CAD reached 2.6% of GDP, while in Q2, it increased to 3.04% of GDP. Since the financial and capital account only recorded a small surplus, the BoP reported a deficit of around $1.98 billion, which led FX reserves of the Central Bank to decline to $123.8 billion. FX reserve trends reversed, rising to $125.9 billion in July.
As always in the past, both exports and imports bounced back after plunging in June, the month of the Muslim holidays. Exports m/m jumped 31.02%, to $15.450.7 million in July, while imports jumped by 34.96%, to $15,514.2 million, resulting in a trade deficit of $63.5 million. Inflation in July was relatively mild, at 0.31%, bringing y/y inflation to of 3.32%, at the lower part of the Central Bank’s target corridor. To maintain growth momentum, the Central Bank cut the benchmark interest rate by 25 basis points, to 5.5%.
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