The past month has given investors more reasons to be optimistic on the outlook for Indonesia’s economy. The first piece of good news came in late July when it was announced that the highly-respected and pro-reform, Sri Mulyani Indrawati, would be returning to the position of finance minister. The second was the publication of GDP figures for the second quarter, which showed Indonesia grew at its fastest pace in ten quarters. While we think the worst is now over for Indonesia’s economy, a strong rebound is unlikely. The collapse in commodity prices has opened up a big hole in the government’s balance sheet that needs repairing, and fiscal policy looks set to become a drag on growth over the coming quarters. Indeed, President Joko Widodo recently signalled that the government would have to cut back on its spending plans for the coming fiscal year due to a short-fall in revenues from the commodity sector.
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