Posted on October 14, 2014

QNB Group has published its Indonesia Economic Insight 2014. The report examines the outlook for the Indonesian economy and the challenges faced by the new Jokowi administration, such as capital flight and an infrastructure gap, amidst the constraining environment of a slowing economy.

According to the report, the tightening of global liquidity emanating from the tapering of Quantitative Easing (QE) in the US has led to periodic bouts of capital outflows from Indonesia, exchange rate weakness and higher inflation since mid-2013. In response, the Indonesian central bank has hiked interest rates to combat inflation and used international reserves to support the currency, while the government has introduced export restrictions to reduce domestic price increases.

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As a result, real GDP growth slowed to 5.1% in the year to Q2 2014, from 5.8% in 2013, reflecting lower exports and weak investment spending. We expect real GDP growth to slow further from 5.1% in 2014 to 4.5% in 2015 as the exchange rate could weaken further and policies remain tight. An export- and investment-led recovery in 2016 could lift growth to 5.2%, provided reforms are implemented. Inflation may rise from 5.5% in 2014 to 6.0% in 2015, owing to fuel subsidy cuts and currency weakness, before easing to 5.0% in 2016 once the currency stabilizes.

The weaker IDR should help reduce the current account deficit over the medium term, by making imports more expensive and exports cheaper. However, gains from greater export competitiveness may be limited by the large share of imported intermediate goods in finished exports. The removal of subsidies should help reduce the fiscal deficit in 2015-16, while allowing greater fiscal space for much needed infrastructure investment. Banking sector growth is expected to continue slowing in 2014–16 on tighter domestic liquidity and rising interest rates.

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Deposit growth should fall into single digit, based on further capital outflows likely in 2015. The LDR is projected to rise to close to 100% by end-2016 as banks draw on their foreign credit lines to maintain loan growth. Other recent QNB Economic Insight reports include China, Jordan, Kingdom of Saudi Arabia, Kuwait, Oman, Qatar and UAE are available on the QNB Group website. QNB Group operates in 26 countries in Asia, Europe, the Middle East and North Africa and its economic reports leverage its knowledge of these markets to provided added value for its clients and counterparties.

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