Efforts to spur growth in 2015 through higher spending and major infrastructure projects produced mixed results for Indonesia, in a year dominated by weaker commodity prices.

As the year drew to a close, international financial institutions maintained GDP growth forecasts of close to five per cent for 2015.

While still ahead of the global average, this marks the country’s slowest rate of expansion in more than five years.

There was further concern when the Ministry of Finance warned in mid-December that the fiscal deficit could rise as high as 2.78 per cent of GDP in 2015, close to the legally mandated three per cent cap.

A balancing act In addition to contradicting constitutional guidelines, breaching the three per cent of GDP deficit ceiling would likely put greater pressure on the rupiah, which depreciated by 9.8 per cent against the dollar in 2015.

At the same time, however, scaling back fiscal spending risks dampening one of the economy’s major engines for growth.

Public expenditure is set to rise by around seven per cent in the coming year, with the government approving a US$153 billion budget for 2016 in late October.

The country’s plans received an endorsement from the World Bank in mid-December, when it praised the government’s decision to increase capital allocation and announced revised GDP growth forecasts of 4.7 per cent (2015) and 5.3 per cent (2016).

Other analysts echoed the bank’s sentiments, underscoring the importance of government spending as a means of generating investment and supporting broader economic growth.

“With public spending gaining more momentum, we see the stage set for a strong rebound in [the second half of 2015], with a growth dividend coming through meaningfully in 2016,” Wai Ho Leong, senior regional economist at Barclays Investment Bank, commented in a research note in September.

There are early signs that Indonesia’s economy is beginning to feel the effects of the government’s renewed infrastructure focus, with a raft of projects, including power plants, highways and a US$1.5 billion mass rapid transit project earmarked for Jakarta, high on the government’s agenda.

After capital spending lagged in the first half of 2015 on political and legal delays, annual cement sales – a common proxy for construction activity – rose by 15 per cent in August, according to Citi Research, the first increase since January.

Diversification drive Indonesia remained focused on spurring domestic economic momentum in 2015, against a backdrop of fluctuating commodity prices and a challenging global financial climate.

China’s slowdown has been a top concern for the country, as it accounts for almost 20 per cent of Indonesia’s trade.

“In all 22 commodities that we monitor, only two were rising on (a) month-to-month basis,” Suryamin, head of Statistics Indonesia, told media in mid-December.

Shipments of Indonesia’s main commodities, including coal and palm oil, were also down, as the country posted a US$346.4 million trade deficit in November, its first in 12 months.

With little to suggest that China’s slowdown is easing, the key challenge for Indonesia in 2016 will be to reduce its dependence on commodity exports, which account for roughly two-thirds of outbound trade.

Manufacturing and industry, in particular, are seen as potential drivers of new growth.

The government has pledged to introduce tax incentives and measures aimed at attracting capital inflows, including lower energy tariffs for labour-intensive industries such as petrochemicals, ceramics and glass.

According to the Ministry of Industry, this could see the sector grow by 5.7 per cent in 2016, up from an estimated 5.3 per cent in 2015.  Additionally, recent reforms to Indonesia’s business environment should help to facilitate new investment, with deregulation and simplification of business permitting procedures enacted in 2015.

Interest rate expectations While inflation reached its lowest level in six years in December, easing to 3.35 per cent year-on-year, this was largely due to a high base of comparison – inflation rose above eight per cent after the government raised subsidised fuel prices in late 2014.

As inflation nonetheless stands on the low end of the government’s three to five per cent target band, analysts expect Bank Indonesia (BI) will have greater room to cut interest rates at its next monetary policy meeting, scheduled for mid-January, helping to spur further growth in the year ahead.

“There is indeed room for BI to cut rates,” Wellian Wiranto, an economist at OCBC Bank in Singapore, told regional press in early January.

“As long as global market sentiment remains relatively calm, we see it cutting by 25 basis points this month.”