Indonesia to maintain 5% growth to 2027

JAKARTA: Indonesia’s economy is expected to grow at a rate of 5% this year and next, supported by resilient domestic demand, improving financial conditions and a moderately expansionary fiscal stance, according to the latest assessment from the Organisation for Economic Cooperation and Development (OECD).

“Low inflation and easing financial conditions will spur private consumption and investment. However, slowing export growth amid rising global trade frictions is expected to weigh on activity,” stated the OECD Economic Outlook, published on Tuesday.

The analysis projects a slight increase in gross domestic product (GDP) growth to 5.1% in 2027, which is in line with recent growth rates.

GDP expanded 5.04% year-on-year in the third quarter of this year, driven by solid household spending and a positive contribution from net exports.

The intergovernmental forum sees Indonesia’s inflation this year declining to 1.9%, at the lower end of Bank Indonesia’s target range of 1.5% to 3.5%, “on the back of limited demand pressures and low energy prices”, before rising to 3.1% next year and 3.2% in 2027.

Headline inflation slowed to 2.72% in November from 2.86% in October after averaging just 0.6% in the first quarter, with the increase attributed to the government’s temporary electricity discount ending.

Business sentiment stabilised and prices for key export commodities have improved, the report notes, but elevated borrowing costs and unemployment are keeping households cautious about spending, although inflation is low by regional standards.

“Lending growth remains well below the pre-easing and pre-pandemic averages,” the report said, adding there was “room for the central bank to reduce the policy rate further by around 50 basis points towards a more accommodative level”.

Government spending is set to rise over the coming years as the authorities channel more resources into social assistance and infrastructure, according to the OECD outlook, adding that the expanding free nutritious meal programme, along with higher investment in transportation and public services, will push expenditure higher overall.

Public debt is expected to remain manageable, though improving tax collection will be important to keep long-term finances on a stable path, it said.

“Raising the efficiency of public spending is a key policy priority, including through improved targeting of social benefits to vulnerable households. Strengthening the governance of public investment through improved planning, monitoring and evaluation would help ensure that infrastructure spending delivers stronger growth outcomes,” the report said.

The OECD has assessed the direct effect of the United States’ 19% tariff policy for most goods shipped from Indonesia as “mild”, given that US-bound exports account for less than 2% of GDP. — The Jakarta Post/ANN