JAKARTA (TheInsiderStories) – The Government of Indonesia is projecting national gross domestic product (GDP) to grow by 5.17 percent at most by the end of this year, as credit growth of banks is more subdued than expected.

Finance Minister Sri Mulyani Indrawati has revealed the latest GDP prognosis for the second half is slightly lower than the 5.2 percent GDP target enumerated in the Revised State Budget for 2017. She said, it will be difficult to see credit growth reaching initial target of 12 percent by the end of 2017.

Data from the Indonesia Financial Services Authority shows bank credit only grew by 8.2 percent between January-July 2017. Indrawati posited that credit growth in the first half was still sluggish and thus became the reason why investment contributes less to GDP, despite exports recovering since end-2016.

“If GDP grew 5.17 percent, investment must grow 5.4 percent in the second half, so overall investment growth can reach 5.2 percent by the end of this year,” she explained at the hearing with parliament on Thursday (7/9).

However, she said, household spending this year is still robust, growing around 5 percent, despite consumer price index in August showing 0.07 percent deflation, the second time this has happened this year (after March).

“With government efforts to accelerate spending in the second half, we expect purchasing power to be maintained at a stable level,” she stated.

Indrawati explained the purchasing power will still grow, around 4 percent for working- class citizens and 8 percent for middle-class ones, or down from last year’s 6.5 percent and 10 percent, respectively. However, purchasing power growth in 2017 is still stronger than that of 2015, which was relatively stagnant.

The government projection is similar to that of Bank Indonesia (BI) statement that adjusts previous GDP estimate to 5.17 percent, following a major correction in the third quarter of 2017.

“But the contribution to GDP in the second semester will be better than that of the first semester (5.01 percent),” added Agus DW Martowardojo, BI Governor.

He explained that domestic economic activity is still in recovery while investment will be a key driver of GDP growth, apart from household spending and exports. Global economic growth also continues to improvement and rising commodity prices will draw investment into the country.

BI has shown support for the economy through its monetary policy, as the central bank eased its 7-Day Reverse Repo Rate of 25 basis point to 4.5 percent last month. The decision followed moderate inflation expectation as of end-July, year to date inflation standing at 2.6 percent, or 3.8 percent on an annual basis.

The central bank expects credit growth of banks will reach 8 to 10 percent in 2017, and will be hiked next year, as the banking sector is still consolidating and is expected to cut credit rates and push credit supply onto the economy.

Indonesia’s GDP growth was steady in the second quarter of 2017, or below expectations. GDP expanded 5.0 percent over the same period of the previous year, matching the first quarter’s (Q1) printed.

Rising investment offset a notable drop in government spending, and disappointing performance from the external sector. Government consumption swung from a notable 2.7 percent expansion in Q1 to a 1.9 percent contraction in Q2, holding back momentum in the economy.

However, household spending was resilient, despite higher electricity tariffs dampening purchasing power, and came in at a robust 4.9 percent in Q2, mirroring Q1’s increase. The investment was a bright spot in the data and growth picked up from 4.8 to 5.4 percent.

The external sector’s contribution to growth was steady, as slower growth of exports was balanced out by a deceleration in imports: exports grew a lackluster 3.4 percent in Q2, down from 8.2 percent in Q1.

While a better external environment is supporting overseas sales, mixed performance for commodity prices during the period and a distortion in trade flows due to the earlier timing of Eid weighed on the results. Import growth also slowed, from 5.1 percent in Q1 to 0.5 percent in Q2.

2018 Budget

According to Indrawati, the government will maintain the momentum of economic growth. The basic assumption of economic growth is agreed to touch 5.4 percent, the inflation rate staying around 3.5 percent, the rupiah exchange rate at Rp 13,500, and the 3-month Treasury note rate at 5.3 percent, the Indonesian Crude Price at US$48 per barrel, oil lifting of 800 thousand barrels per day, and gas lifting of 1.2 million barrels of oil equivalent.

Inflationary pressures can be controlled so far, especially with regard to volatile food and administered prices. With low inflation, consumption is expected to be maintained, with growth of above 5 percent. Similarly, Indonesia’s strong trade performance (against the tide, as global trade stays sluggish), as shown from our positive trade balance.

“The economic package will continue to be focused on improving real sector performance, simplifying regulations and policy streamlining, as well as improving our ability to drive the economy through better service to the business world,” she assured member of parliament.

While economic growth next year is expected to pick up, the Minister pointed to the protectionist trends of certain countries, especially developed ones, and to geopolitical conditions both within and outside our nation.

The 2018 Budget is predicated on State revenues of Rp1,878.4 trillion and state expenditures of Rp2,204.4 trillion, with a budget deficit of 2.19 percent, or Rp325.9 trillion.

Writing by Rahmat.Fiansyah, Email: rahmat.fiansyah@theinsiderstories.com