China's Riskiest Policies for the Indonesian Economy

China's monetary tightening policy aimed at curbing non-performing loans is predicted to have the most significant impact on Indonesia's economy in 2017. The Ministry of National Development Planning/Bappenas, in its 2017 Indonesian Economic Outlook titled "Challenges Facing Global Risks," predicts Indonesia's economic growth at 5.2 percent. This figure does not yet account for global or domestic risks.

From a global risk scenario, China's monetary tightening is predicted to have the most significant impact on the domestic economy, reaching -0.72 percent from the baseline of 5.2 percent. The Chinese government's policy to stimulate growth has resulted in the risk of defaults (rising NPLs) and unsustainability. Therefore, the Chinese government is attempting to control credit, impacting economic growth and the flow of investment from China to other countries, including Indonesia. Meanwhile, Donald Trump's election could lower economic growth by -0.41 percent from the baseline (target).

From a domestic risk scenario, budget cuts, low tax revenue, and slowing bank credit accompanied by rising non-performing loans could also hinder Indonesia's economy in 2017. However, the government's easing of monetary policy to stimulate growth and the inflow of repatriated funds from the tax amnesty program could support the domestic economy.