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Jokowi heads to 2018 with backing of stronger Indonesian economy

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Indonesia's economy is in a stronger position as it enters 2018, bolstering President Joko Widodo as the nation gears up for elections.

[JAKARTA] Indonesia's economy is in a stronger position as it enters 2018, bolstering President Joko Widodo as the nation gears up for elections.

Having notched up growth above 5 per cent in every quarter so far this year, the economy is forecast by the government to expand 5.4 per cent in 2018, which would be the fastest pace in five years. The median estimate in a Bloomberg survey of economists is for growth of 5.3 per cent.

Foreign investment is picking up, inflation is subdued, more people are in jobs and a landmark infrastructure program is taking shape. That's a far cry from when the president, known as Jokowi, took office in October 2014, faced with a slowing economy, inflation exceeding 8 per cent and a weakening currency.

With local elections in June and attention already turning to the 2019 presidential race, the economy's recovery adds support for Jokowi if he seeks a second term.

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Here are some of the key issues economists are watching for next year:

  • Fiscal Outlook: With a budget deficit cap of 3 per cent of gross domestic product, the government is putting more efforts into boosting tax revenue to help finance spending plans. It plans to bring the deficit down to 2.2 per cent of GDP next year from an estimated 2.9 per cent this year.

"The main message from the proposed budget is one of fiscal conservatism and thus limited impulse on growth," JPMorgan Chase & Co economists wrote in a report. "With the fiscal position expected to tighten, it remains to be seen whether 2018 growth will be able to reach the 5.4 per cent that is penciled into the budget."

  • China Risks: An export boom across Southeast Asia has benefited Indonesia as well, with the trade surplus reaching its highest in almost six years in September, helping to keep the current-account deficit under control.

Andrew Tilton, chief Asia Pacific economist at Goldman Sachs Group Inc, said a more significant slowdown in Chinese investment growth "could hurt growth and exports from regional economies including Indonesia."

  • Interest Rates: As the Federal Reserve leads central banks around the world in tightening monetary policy, Bank Indonesia has stood its ground. Following eight interest-rate cuts since the beginning of last year to spur growth, policy makers are now focused on currency risk and signaled recently that the room for further easing is "relatively limited."

David Sumual, chief economist at PT Bank Central Asia in Jakarta, said the economy is in a stronger position than it was several years ago, giving the central bank room to hold off on raising interest rates just yet.

The situation could change if the Fed and other central banks accelerate the pace of rate hikes, he said.

Inflation has also been subdued, reaching 3.3 per cent in November. Bank Indonesia expects a further deceleration in 2018, reducing its target to a range of 2.5 per cent to 4.5 per cent from 3 per cent to 5 per cent this year.

Economists surveyed by Bloomberg have diverging views on where the benchmark rate is headed next year, with forecasts ranging from a cut, no change to an increase.

  • Election Plans: Official campaigning for the 2019 presidential election kicks off in September, while regional elections are due in June. That may distract the government from its reform push, which has been "somewhat more gradual" this year, according to Anushka Shah, a sovereign analyst at Moody's Investors Service in Singapore.

BLOOMBERG