Indonesia GDP growth pegged at 5.8%

But risky restrictive policies and slowdown in reform progress may hamper medium-term growth.

According to Nomura, Indonesia's 2012 GDP growth is expected at 5.8%, a little below the consensus forecast of 6.0%. However, the combined risk of more restrictive policies and the slowdown in the progress of reforms, which we see sustaining for the next two years, suggests that medium-term growth will be affected. As a result, we have reduced our estimate of Indonesia‟s potential output growth over 2014-19 to 6.5% from 7.0%.

Here's more from Nomura:

In the near term, we estimate that the risk of more delays in reforms and policies that sour the investment climate could have a sizeable impact on the balance of payments (BOP). In a worse case, we estimate that FX reserves could fall to USD86.5bn by the end of this year from USD106.5bn in June and a peak of USD124.6bn in August 2011.

Looking at recent announcements on trade and investment policy, we provide an update on where policies currently stand and draw the following conclusions:

The resource-based and banking sectors are likely to remain the primary focus of investors. However, the implementation of trade policies such as import restrictions and export taxes, as well as other administrative measures, should be watched closely.

One argument not to be too alarmed by these policy announcements is that these are not new and are based on legislation which have sound economic rationales. If implemented properly, they could in fact provide longer-term benefits.

However, we think the policies also mark a shift in the regulatory environment in large part due to changing political dynamics. As such, there is now an elevated risk of policy uncertainty over the next two years ahead of the 2014 elections. We see the rising risk of a policy impasse over this period, or at worst, more policies that restrict investment further.