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Indonesia’s GDP grew 5.0 percent in 2016, only slightly below what Fitch expected in its last GEO. Growth edged up a bit higher in 2016 as headwinds from activity in commodity-related sectors started to fade.
Iron ore mining increased 1.8 percent in 2016 after dipping 10.7 percent in 2015. Domestic demand remained well balanced with private consumption and investment growing at a similar pace. However, Indonesia’s external trade remained weak, with both export and import volumes contracting for the second year in a row, Fitch Ratings reported.
Domestic demand was supported by an accommodative monetary policy stance. The Bank of Indonesia cut the benchmark interest rate six times in 2016, by a total of 150 basis points. Credit did not pick up (as banks’ willingness to lend has been constrained by rising non-performing loans), but lower interest payment encouraged spending. In addition, low inflation boosted households’ real income and supported consumption.
"We expect some further pick-up in growth in 2017 and 2018, mainly driven by public investment and the lagged effect of monetary policy easing of the past year," the report commented.
Meanwhile, the stepped-up structural reform effort should also support business investment. Activity in commodity-related sectors (such as iron ore and coal) should hold firm given the recent recovery in global commodity prices.
