Satria Sambijantoro, Jakarta – All signs point to a less than rosy outlook for Indonesia, as weaker purchasing power is poised to drag down economic growth, which is already under pressure from moderating investments and slow budget disbursement.
The revised 2013 State Budget has targeted gross domestic product (GDP) growth to reach 6.3 percent this year, but analysts are skeptical about whether the government could achieve such an ambitious growth target.
The reason is mainly because of soaring inflation from the fuel price hikes. Higher inflation would put a strain on household consumption, which contributes almost 60 percent to GDP growth.
Bank Indonesia (BI), the central bank, has forecast that annual inflation might top as high as 7.65 percent following the fuel price hike. Last week, the government adjusted the price of Premium to Rp 6,500 (65 US cents) and diesel fuel to Rp 5,500, from their previous prices of Rp 4,500.
"The government's growth assumption in the revised 2013 State Budget is not realistic," said Enny Sri Hartati, a director with economic think-thank the Institute for Development of Economics and Finance (INDEF).
"It's really difficult for the economy to grow above 6 percent after the increase in the price of subsidized fuels, as the policy will incite high inflation that can curb people's purchasing power."
New investment, another major growth driver, is predicted to moderate as a heated political climate ahead of the 2014 elections has prompted regulatory uncertainty, deterring potential investors.
In addition, existing companies would also think twice about increasing investments, as they will have to cope with persistently low commodity prices, as well as soaring input costs such as labor, electricity and fuel, analysts say.
"With an unhelpful coal price, moderately tighter monetary conditions and rising costs, our model suggests real investment growth will decelerate further in the second quarter and remain sluggish in the second half of the year," Credit Suisse economist Santitarn Sathiratai wrote in a research note, titled Indonesian Economy: the End of the Investment Boom.
"Looking ahead, we struggle to find positive catalysts that would enable a strong rebound in real investment growth in Indonesia," he added
With such conditions, the most realistic option for policymakers to spur growth might come from government spending, known to have huge multiplier effects in the economy. A growth target of 6.3 percent would be "sensible" to achieve if government spending can be pushed upwards, Finance Minister Chatib Basri said.
But, contribution from government spending is predicted to remain insignificant due to the persistently slow state budget disbursement. In the first six months this year, the realization of government spending only stood at 32.2 percent, or Rp 541 trillion, of total earmarked budget, lower than the 34.1 percent realization figure that the government posted in the same period last year.
Analysts have warned that an economic slowdown happening at a time when a country sees significant surge in debt – a situation that Indonesia is witnessing right now – would eventually weaken the country's external position.
"If growth slows below 5.5 percent, then debt-to-GDP profile, which has been a strong downtrend over the past decade, may start rising," Barclays Bank economist Prakriti Sofat wrote in a research note titled "Indonesia Outlook: Growth Hiccups".
Some observers, meanwhile, have expressed concerns regarding the sustainability of Indonesia's economy in the medium-run. In May, international ratings agency Standard & Poor's downgraded its outlook for Indonesia to "stable" from "positive", citing policymakers' failure to expedite reforms. And the situation might turn from bad to worse.
"While in the near term we do not expect any outlook changes from [international ratings agencies] Moody's or Fitch, we believe that over the next six to 12 months, the risk of an outlook revision to 'negative' from 'stable' will increase, on sustained loss in economic momentum and a possible reduction in global liquidity further exposing Indonesia's external vulnerabilities," Sofat said.