RHB Indonesia Morning Cuppa - 22 September 2016- (Economic Outlook)

Good morning,

Economic Outlook: Economic Growth To Be Capped Amid Fiscal Consolidation

¨ Despite facing fiscal consolidation, real GDP is projected to expand by 5.3% in 2017, slightly faster than an estimate of +5.1% in 2016.We believe an improvement in consumer and business spending, supported by the government’s earlier economic stimulus packages and the lagged effect of monetary policy easing, will likely be more than enough to offset slower fiscal spending.

¨ Exports will likely return to growth in 2017, albeit remaining sluggish, on account of the relaxation of mineral export ban and a sustained demand from developed countries. Imports are also expected to grow in tandem with rising domestic demand that could put pressure on net exports during the year.

¨ The draft of the 2017state budget is set to gear towards meeting the 2.4% of GDPfiscal deficit target. However, given the disappointment in the tax amnestycollection and to support economic growth, we project the fiscal deficit to widen to 2.8% of GDP,from an estimate of -2.7% of GDP this year.

¨ The current account deficit in the balance of payments will likely remain manageable in 2017, albeit deteriorates slightly as a result of a larger deficit in the services and primary income account. The deficit will likely increase to 2.4% of GDP in 2017, from an estimated deficit of 2.2% of GDP in 2016.

¨ We expect inflation to ease further to an average rate of 3.8% in 2017, down from an estimate of +4.0% in 2016, on account of low oil prices and manageable volatile food prices. As the inflation will likely remain lowand there is still a need for additional easing to stimulate growth, we expect another 25 bps cut to 7-Day (Reverse) Repo ratefor the remaining 2016 and 50 bps cut in 2017. (Rizki Fajar)

Link to report: Economic Growth To Be Capped Amid Fiscal Consolidation

Link to Daily report: Indonesia Morning Cuppa - 220916