Fiscal spending crucial for Indonesia’s 2015 GDP growth

Investment growth has been sluggish.

In the revised 2015 budget, government’s capital expenditure will make up about 21% of the overall government budget, highest in more than 10 years.

According to a report by DBS, GDP growth is likely to come in at 5.0% for full-year 2014. Investment growth has been sluggish throughout the year, amid a weak rupiah and the tight monetary policy bias. After averaging 9% in 2010-12, investment growth has slowed to an average 5% in 2013-14. Private consumption growth remains steady at circa 5.4% in 2014, albeit easing slightly in 4Q14 on the back of the spike in CPI inflation.

The key difference for 2015 will come from an accelerated fiscal spending expected this year. In the revised 2015 budget, government’s capital expenditure will make up about 21% of the overall government budget, highest in more than 10 years.

Starting this year, government project tender exercises have to be completed by March, to speed up fiscal disbursement. A one-stop platform for new business permits was introduced last week, as the government understands the important role of the private sector in the infrastructure overhaul.

Here’s more from DBS:

Expect GDP growth at 5.5% in 2015. This is slightly lower than the government’s current estimate of 5.7%. Some downside risks remain. On the external front, commodity prices will continue to weigh on export growth potential this year.

On domestic demand, while lower oil prices mean lower fuel prices, CPI inflation is unlikely to fall sharply for now. Private consumption growth is unlikely to provide any further support to overall GDP growth than what it already did in recent years. The government’s effectiveness in delivering its fiscal spending will be crucial.