As the main source of growth in the economy, private consumption (57% of GDP in 2016) is stimulated by an increasing population, an increasing urbanization, and a rise in GDP per capita allowing the emergence of a middle class. The moderation of inflation, contained in the lower portion of the target of 4 ± 1% of the central bank, should support this private demand. The infrastructure development Programme launched by the Government of President Widodo in 2016 (225 priority infrastructure projects), as well as the recent reforms to simplify administrative procedures, should Boost investment (32% of GDP).
Finally, exports (19% of GDP) of raw materials (oil and gas, palm and copra oils, lignite, copper), as well as electrical and computer components, automobiles, paper, clothing and goldsmiths’ products, will be Dynamic but offset by the vigour of imports linked to domestic demand.
Constrained by a constitutional limit of 3% annual deficit, the Indonesian government has undertaken tax reforms to control its spending and increase its revenue. Subsidies (including energy) have been reduced to reorient public spending towards infrastructure investments. On the revenue side, the increase linked to remittances following the tax amnesty set up in 2016 (+ 3.6% of Revenues end 2015 and 2016) should not allow the Government to achieve its objectives. This lack of income is likely to lead to a reduction in spending. In this context of controlled public deficit, the public debt should remain low, with interest rates declining following the new “investment grade” ranking of Business in Indonesia by the three major rating agencies. From the point of view of the current account, the trade balance is surplus (1.6% of GDP in 2016), thanks to the lightening of the oil bill, constituting 14% of imports in 2016. The balance of services is low in deficit (-0.8% of GDP) but the main cause of the current deficit is the revenue shortfall (-3.3% of GDP), linked to the repatriation of dividends and the payment of interest on debt. This current deficit is largely financed by FDI flows (1.7% of GDP) and portfolio investment (2.0% of GDP), allowing the Indonesian central bank to accumulate reserves. The latter leads a policy of monetary easing illustrated by the surprise drop in its reference rates in August 2017 in order to stimulate activity. The rupee remains dependent on short-term capital flows with 39.5% of sovereign bonds denominated in rupee held by foreigners.