Indonesia’s gross domestic product (GDP) growth has decelerated to its slowest rate since the global financial crisis five years ago, with the country’s commodity based exporters taking the hardest hit, highlighting the urgency of President Joko “Jokowi” Widodo to swiftly undertake economic reforms to boost the manufacturing sector.
Sluggish external demand continued to weigh on the Indonesian economy, as exports contributed the most to the slowdown, weakening by minus 0.7 percent in the third quarter.
Investment and consumption, Indonesia’s two largest growth drivers, grew by 5.4 percent and 4 percent, respectively. Both declined slightly compared to the same quarter last year.
“The economic slowdown in China, Europe and Japan is behind the weakness in the prices of commodities such as coal, crude palm oil, rubber and other mining commodities,” Bank Indonesia (BI) Senior Deputy Governor Mirza Adityaswara said on Wednesday.
- Q3 growth expands by 5.01% y-o-y on year, the slowest since 2009
- Exports contribute most to economic slowdown
- GDP expected to grow by between 5.1 and 5.5% in Q4
He argued that the latest growth data was better-than-expected, pointing to the fact that the central bank had initially predicted that the economy would grow only 4.9 percent in the third quarter.
The economy could grow by 5.1 percent in the fourth quarter, with the assumption that no fuel price increases are implemented, according to Mirza.
“As commodity prices are likely to remain weak, the challenge for Indonesia going forward is how it can develop its manufacturing- and services-based exports,” he noted.
Nevertheless, the slowdown was still in line with BI’s growth forecast, according to BI Deputy Governor Perry Warjiyo, who predicted Indonesia’s year-end GDP growth would fall between 5.1 and 5.5 percent.
During his presidential campaign, Jokowi pledged to spur Indonesia’s economic growth to 7 percent, vowed to cut red tape and build growth-generating infrastructure projects to achieve such an objective.
The President also plans to raise the prices of subsidized fuel to cut subsidies so more funds are allocated to infrastructure projects. The cost of the fuel subsidies are estimated to top Rp 276 trillion (US$22.7 billion) next year, about 15 percent of total state spending.
The amount allocated for fuel subsidies is higher than infrastructure spending.
But analysts say that, given limited fiscal space and the tight monetary policy environment implemented by BI, the new President faces an uphill battle to spur growth.
“If the President is going to get anywhere near his growth target, he will need to revive the country’s stalled reform process,” said Gareth Leather, an economist with UK-based research firm Capital Economics.
“The economy is unlikely to get much help from the central bank,” he added.
BI has repeatedly signaled that the benchmark interest rate — which has been left unchanged at 7.5 percent since November last year — will not be imminently cut to boost growth, citing the possible tightening in monetary policy in the US that could weaken the rupiah, as well as the possible increases in fuel prices that could drive up inflation.
However, the central bank should take into account “further turbulence ahead” in the economy in the next quarter as the recent adjustment in energy and utility prices may risk weakening domestic consumption and investment, said Helmi Arman, an economist with Citi Research.
“GDP growth in the fourth quarter of 2014 is likely to slip below 5 percent year-on-year,” he warned.
“The slowing growth trend further reduces the possibility of a policy rate increase, despite potentially rising inflation.” (Satria Sambijantoro, The Jakarta Post)