Photo by ADB

JAKARTA (TheInsiderStories) – Indonesia’s gross domestic product (GDP) remains strong, in line with steady growth across most developing countries in Asia, the result of a broad-based recovery in global trade, robust expansion in major industrial economies and improved prospects for China, as well as robust investment.

In its latest report, the Asian Development Bank (ADB) estimates GDP growth in developing countries in Asia will come in above previous projections, while Indonesia remains strong at 5.1 percent in 2017 and 5.3 percent in 2018, in line with an earlier growth forecast.

‘Indonesia’s economy remains resilient amid global uncertainties, with growth poised to come in at a healthy pace this year,’ said Winfried Wicklein, ADB Country Director for Indonesia.

He stated that strong investment and an export rebound in Southeast Asia’s largest economy supports a healthy pace of growth in the first half of 2017, with growth above 5 percent with momentum expected to continue to build this year and next.

Government consumption, he added, is also expected to boost growth in the second half of 2017. Meanwhile, private investment should expand gradually over the period forecast, as it benefits from policy reform, improving the business environment, while Standard & Poor’s recent upgrade of Indonesia’s sovereign rating to ‘investment grade’ should accelerate capital inflows, including foreign direct investment (FDI).

‘Credit growth should improve gradually following the recent Bank Indonesia rate cuts and additional measures to allow banks more flexibility to manage liquidity. Fiscal policy continues to be growth supportive. The revised budget foresees total expenditures somewhat higher, notably with higher allocations for public infrastructure, healthcare, and education,’ he said.

In spite of the rollback of the government’s energy subsidy, which saw electricity prices increase, private consumption remained robust. Consumer confidence is seen to hold up well, benefitting from a stable rupiah and expectations of tamer inflation, with headline inflation expected to decline to an average of 4 percent in 2017 and 3.7 percent in 2018.

Indonesia’s trade prospects remain mixed, with recovery and growth among its trading partners uneven and downward pressure on commodity prices. Imports are still expected to grow more slowly than exports in the second half of 2017.

ADB maintains its forecast for a current account deficit equal to 1.7 percent of GDP this year, but expects this to widen to 2 percent in 2018, as imports are expected to outpace exports, supplying several large public investment projects. Capital inflows are expected to be more than sufficient to finance the current account deficit, thus adding to foreign exchange reserves.

‘Risks to the outlook stem from progress in government tax revenue mobilization, global commodity prices, and policy uncertainty in advanced economies. These risks underscore the need for Indonesia to maintain a flexible exchange rate and open trade and capital accounts, alongside accelerating structural reform to further strengthen the economy,’ said Wicklein.

As for Asia, ADB forecasts GDP growth of 5.9% in 2017 and 5.8% in 2018 for developing Asia, a slight upgrade from previous projections, bolstered by a revival in world trade and strong momentum in China.

‘Countries in developing Asia should take advantage of favourable short-term economic prospects to implement productivity-enhancing reforms, invest in badly-needed infrastructure, and maintain sound macroeconomic management to help increase their long-term growth potential’ ADB Chief Economist Yasuyuki Sawada added.

Growth across developing Asia is buoyed by a revival in trade. The dollar value of the region’s exports surged by 11 percent in the first 5 months of 2017 over the same period the previous year, and the value of its imports rose by 17 percent. This pickup follows two consecutive years of contracting export volume, caused by falling commodity prices and subdued external demand for our manufactures. Excluding China, the eight largest regional developing economies saw real manufacturing exports rebound.

Industrial economies’ growth will reach 2 percent in 2017 and 2018, up by 0.1 percentage points from the April 2017 forecast. Consumers are keeping the world’s largest economy on track, as the United States’ expansion enters its ninth year. Growth in Japan surprised observers on the upside, spurred by a combination of improving consumer confidence and business sentiment. Expansive fiscal and monetary policies, easing political uncertainty, and robust market confidence are driving recovery in the euro area, the report said.

Expansionary fiscal policy and unanticipated external demand helped the PRC exceed expectations in the first half of 2017. Output will increase 6.7 percent in 2017, up 0.2 percentage points over the previous forecast. In 2018, growth will slow to 6.4 percent, as anticipated reforms to trim industrial overcapacity and reduce financial risks kick in.

India continues its strong showing, although demonetization and implementation of the new goods and services tax regime have disrupted consumer spending and business investment. These short-term impediments are expected to dissipate, allowing these initiatives to generate growth dividends over the medium term. India’s GDP growth is downgraded to 7 percent in FY2017, a 0.4 percentage point drop from the April forecast. In FY2018, the forecast is adjusted down to 7.4 percent from 7.6 percent.

Southeast Asia, meanwhile, is set for stronger growth as output accelerates steadily from 5 percent in 2017 to 5.1 percent in 2018, an upgrade from 4.8 percent and 5 percent in the previous forecast. Regional growth will be led by rising exports from Singapore and Malaysia, while the forecasts for regional leaders Indonesia and Thailand are maintained.

Growth forecasts for Central Asia are revised up this year and next amid stable oil prices, improving prospects for the Russian Federation and rising remittances. The Pacific outlook, on the other hand, is retained for 2017 but adjusted slightly downward for 2018, as prospects for the largest Pacific economies—Papua New Guinea and Timor-Leste—are unchanged.

Risks to the region have become more balanced. Loose fiscal policy in the US and lower oil prices are potential upside risks to the region, while downside risks include tighter global liquidity, economic disruption from a geopolitical event, or a weather-related disaster. While the region remains better prepared for potential risks from the US unwinding its quantitative easing, high debt levels in Asia and the Pacific now pose a risk to financial stability. Because long-term interest rates in many Asian economies are closely linked to those in the US, policy makers need to strengthen their financial positions further and monitor debt levels and asset prices.

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