Indonesia's economy is expected to rebound to 5.4% in 2018 as consumption recovery and continuing infrastructure investment is projected to deliver firmer growth by next year, according to Bank of America Merrill Lynch.
BofAML notes that this year's growth has been held back low levels of private consumption but is expected to rally the next year as the fundamental drivers remain solid with the opening of four million new jobs, solid wage growth and low food inflation recorded this year.
"On the policy front, we expect both monetary and fiscal policy to remain supportive of the economy in 2018. As inflation slows and growth remains below potential in the near-term, we are anticipating Bank Indonesia to lower its policy rate by a further 25bp sometime in 1Q 2018,â€ they added.
Ongoing infrastructure projects are also expected to boost investment as it nears completion in 2019 whilst exports are expected to be propped up by favourable global environment and stable growth in China.
Hereâ€™s more from BofAML
Alongside the gradual closing of the output gap, core inflation is expected to tick up to 3.3% in 2018 from 3.2% this year. However, headline CPI should continue to soften (2018F: 3.2% vs 2017F: 3.8%) on lower administered price inflation as we are unlikely to see major regulated price changes ahead of the elections.
With the budget assuming crude oil prices to average US$48/bbl in 2018, the risk is clearly towards a higher subsidy bill if there is resistance to change retail prices ahead of key elections. The net impact on overall deficit is likely to be smaller as revenues would be boosted as well - we estimate that every $10 move higher in brent could result in additional revenues of around 0.4% of GDP. Over the longer term, Indonesia needs a more transparent pricing formula for retail prices (like that adopted in Malaysia) rather than the current ad-hoc system in place.