Indonesian expansionary fiscal policy to continue in 2017

The Indonesian government is expected to persist with an expansionary fiscal policy stance to boost growth but without compromising fiscal discipline in 2017.

Recently, finance minister Indrawati said that the government would be able to keep the budget deficit below 3 percent of GDP in 2016, seeking to boost tax revenues while ensuring that the economy does not slow further, intending, therefore, to provide tax incentives and tax holidays. She has also pointed out that the lack of trust in the government is the main challenge in boosting the tax ratio.

As we have been pointing out, the economic recovery is not yet entrenched with the most recent data showing GDP growth nudging down to 5.0 percent y/y in the third quarter of 2016 from 5.2 percent y/y in the second quarter as a result of lower government spending.

On a sequential basis, the economy expanded by 3.2 percent q/q (seasonally adjusted)in the third quarter of 2016 after 4.0 percent q/q (seasonally adjusted) in second quarter with government spending declining by 0.2 percent q/q (seasonally adjusted) in Q3 after it jumped by 35.4 percent q/q (seasonally adjusted) in Q216.

Still, pressure on BI to support growth has diminished thanks to the success of the tax amnesty programme with BI governor Martowardojo noting that it will allow the economy to expand by 5.1-5.5 percent in 2017.

Looking at the week ahead, the December CPI is due on Tuesday and we are expecting the headline inflation rate to ease to 3.0 percent y/y, while the consensus is for 3.1 percent y/y. Recall that CPI inflation picked up to 3.6 percent y/y in November on higher food prices, which accelerated to 8.5 percent y/y in November, as heavy rain in some parts of the country disrupted the output of some basic food commodities.

But core CPI inflation nudged down to 3.1 percent y/y in November and we are expecting it to stay at that rate in December, in line with the consensus.