Indonesian economy to slow down despite pre-election spending

GDP growth is expected to slow down from 5.2% to 5%.

Indonesia’s government spending growth is expected to slow down in 2019 as risks have grown despite government attempts to keep investments supportive of the economy, The Institute of Chartered Accountants in England and Wales (ICAEW) said.

“Looking ahead, modestly higher inflation and lower planned uplifts to minimum wages in 2019 compared to last year are likely to weigh on real household income growth and consumption growth, offsetting the impact of pre-election fiscal giveaways contained in the 2018 Budget,” the firm added.

With the next general election scheduled for April 2019, the government is prioritising keeping fuel prices stable, raising public sector pay and boosting social assistance benefits over infrastructure. Also, the potential for deteriorating SOE balance sheets (in the context of fuel price freezes) and uncertainties over the profitability of some infrastructure projects could challenge the medium-term outlook, ICAEW said.

“And given the widening in the current account deficit during 2018, the government and Bank Indonesia (BI) are concerned about the financial stability risks linked to higher external financing needs, as well as the downward pressure strong import growth places on the IDR,” the group said.

Hence the government has announced measures which aim to cool imports, including delays to some projects and to capital imports (related to certain government and SOE investment plans) – posing downside risks for investment.

“Whilst the outlook for exports remains challenging amid cooling Chinese import demand, import growth is likely to continue to slow this year and we expect net exports to place less of a headwind on growth in 2019. Overall, we expect GDP growth to moderate to 5% this year from 5.2% in 2018,” ICAEW said.