Four key trends to watch in Indonesia’s economy in 2018

Posted on February 15, 2018 By Mohammad Faisal

Jakarta skyline. Credit: Diary of a Hotel Addict, Flickr

The outlook for Indonesian economy in 2018 seems promising. After growing at 5.07 percent last year, the world’s sixteenth largest economy is estimated to grow faster at 5.2 percent this year. There are many things worth watching in this vibrant and diverse economy with a population of over 260 million. Nonetheless, there are at least four key trends to watch this year.

Improved connectivity following the completion of major infrastructure

Infrastructure development is President Jokowi’s main priority. There are 245 national strategic infrastructure projects to be developed throughout the period of 2014 to 2019, with an estimated total costs of 4,197 trillion rupiah (USD 308 billion). The projects are funded by the government, state-owned enterprises (SoEs) and the private sector. It is estimated that at least 50 percent of the 245 projects will be completed by 2019.

As 2018 is the last full year of President Jokowi’s administration, the government is keen on accelerating the infrastructure development to achieve the target by allocating not less than 408 trillion rupiah (USD 29.9 billion) in the 2018 government fiscal year, encouraging the private sector to increase its participation and facilitating various funding schemes for the SoEs to fund the projects.

Amongst the projects to be completed in 2018 is Indonesia’s first ever Light Rail Transit, which is being constructed to connect Jakarta and its satellite cities, Bekasi and Cibubur. The other major projects to be completed this year are the elevated toll road connecting Jakarta and Cikampek, and a number of modern airports in provinces outside Java.

Continued improvements in export performance

Indonesian trade performance has experienced a positive trend since the last quarter of 2016, following an increase in commodity prices in the international markets. Commodities have played a dominant role in the Indonesian economy, contributing to over 55 percent of its exports. In 2018, Indonesian exports are expected to sustain accelerated growth for a number of reasons.

First, a continued increase in commodity prices, which not only includes coal and palm oil – the two largest contributors to Indonesian exports – but also other main commodities like rubber, coffee, natural gas, and non-energy minerals.

Second, stronger domestic consumer spending from Indonesia’s largest trading partners, especially China and the United States. China’s strong domestic demands have also been facilitated by the government policy to cut import duties for various goods, from primary commodities to manufactured goods.

The increase of commodity prices, combined with stronger demands for imports from trading partners, will not only generate economic growth in Java as the heart of the Indonesian economy, but also many provinces outside Java, which are more dependent on commodities. These include Kalimantan (oil, natural gas, coal and palm oil), Papua (minerals), Sumatra (natural gas and palm oil), and Sulawesi (cocoa and coffee).

Tourism business becoming increasingly profitable

In 2017, the Indonesian tourism industry came to an important milestone – the number of international tourists visiting the country reached 14 million, an increase of 22 percent. In the years prior to 2016, the number of international tourists visiting Indonesia was growing at less than 10 percent.

The acceleration started in 2016 when the number of foreign tourists reached over ten million for the first time in history, with growth reaching 10 percent. The number of tourist visits to Indonesia is expected to grow even stronger in 2018. This is thanks to more aggressive tourism promotion by the government, better connectivity as the result of infrastructure development, and the proliferation of the use of social media.

Tourism-related investment such as hotels and restaurants in Indonesia has become even more attractive, not only in major tourist areas like Bali, but also in many other tourist spots throughout the country, including the increasingly popular Raja Ampat, Lombok and Labuan Bajo. The occupancy rate of star hotels in Indonesia in December 2017 grew an average of nearly 60 percent, which is an over three percent higher rate than that in December 2016.

Continued shift to online shopping and stronger e-commerce business prospects

E-commerce and online shopping will continue to grow strongly in the world’s fourth largest market this year. Retail sales through e-commerce in Indonesia is expected to grow 22 percent in 2018. The value of e-commerce transactions in Indonesia reached USD 5.6 billion in 2016.

In 2017, the rapid expansion of e-commerce – along with the slowdown of domestic consumption – has contributed to the decline in conventional shopping, leading to a shutdown of several large retailer outlets, including Ramayana, Matahari, as well as international chain convenience store, 7-Eleven.

The huge Indonesian market, the growing middle-income population, and the increased use of smartphones will facilitate the growth of this business this year. The current share of e-commerce to total retail sales in Indonesia is still below three percent, leaving a huge room for expansion.

Mohammad Faisal is the Director of the Center of Reform on Economics (CORE) in Jakarta and an alumnus of the Australia-Indonesia Leaders Program November 2015.