Indonesia Economy: Slower Growth In Q3, For 5th Consecutive Quarter

Indonesia reported the fifth consecutive quarter of slower growth and the weakest reading in 15 quarters in the third quarter, raising fears that the once stellar-performing Southeast Asian economy could be hitting a wall.

Year-on-year GDP growth in the third quarter slowed to 5.6 percent, down slightly from 5.8 percent in the second quarter. Household and government expenditure growth both accelerated while investment and net exports slowed. The numbers are disappointing, but are in line with expectations.

“For an economy that only a year or so ago some were predicting could be on the verge of sustained growth of 7 percent or higher, growth of under 6 percent is quite a disappointment,” a note from Capital Economics said, while conceding that concerns over the gradual slowdown in Indonesia should not be overdone.

The outlook for Indonesia is also not optimistic. Household spending will likely be checked by higher interest rates, which the central bank has been hiking since summer, and fuel price hikes following a cut in subsidy. Government spending will likely slow as well with the conservative 2014 budget that was recently unveiled.

Investment growth, which has slowed for five consecutive quarters, is expected to continue to slow on higher interest rates, lower commodity prices, uncertainty ahead of the general elections due in 2014, and a general deterioration in the policymaking environment, the Capital Economics note said.

Exports won’t offer any hope despite a recovery in global demand that should provide support for the manufacturing exports sector. Outlook for commodity exporters, the majority of Indonesia’s exports, remains less than rosy as China readjusts its economy away from investment.

With the release of the latest data, experts believe Indonesia’s expansion will stagnate at below 6 percent for both this year and the next, as high inflation and higher interest rates continue to weigh on the rate of expansion.
ibtimes.com

Indonesia Economic Outlook 2014: Stronger GDP Growth On Trade Balance Recovery And Lower Inflation

Indonesia can expect an easier 2014, as the Southeast Asian nation’s economic fundamentals improve across the board. In particular, GDP is expected to grow 5.8 percent, the current account deficit should narrow as the trade balance recovers and inflation should drop to safer levels with no further fuel-price hikes for the year.

The year just ended was rough for Indonesia. After fuel-price hikes, resulting from reductions in the government fuel subsidy, inflation climbed to 8.4 percent at the end of year, nearly double of the 4.3 percent at the end of 2012, and real GDP growth was estimated to have fallen from 6.2 percent to 5.6 percent, according to a Standard Chartered research note.

While most 2013 statistics have not yet been released, the current account deficit is expected to have widened, from $24.4 billion to $32.3 billion. The Indonesian rupiah, as a result of worsening fundamentals and concerns over the risk of capital outflows triggered by the U.S. Fed tapering, weakened to 12,171 rupiahs per dollar at the end of 2013, compared to 9,793 rupiahs at the end of 2012.

But those fundamentals should look up in the coming year. The trade balance, which contributed a great deal to the nation’s current account deficit, will improve as imports slow. The fourth quarter of 2013 was already showing signs of a recovery – the trade surplus rose to $777 million in November from just $24 million in October, according to data from the National Statistics Agency.

In 2012, Indonesia’s trade deficit was just $1.7 billion, while the figure for the first 11 months of 2013 amounted to $5.6 billion.

January 2014 saw the implementation of a law banning mineral exports, which may cause the potential loss of revenue of $5 billion, but since the law excludes coal, which contributes around 13 percent of Indonesia’s total exports, the impact of the ban on the nation’s overall exports should be limited.

As the trade balance gets under control, the overall current account deficit is expected to fall back to $26.9 billion (3.1 percent of nominal GDP) in 2014 from the 3.7 percent in 2013. Before 2011, the nation was still consistently running a current account surplus.

The legal limit of budget deficits in Indonesia is 3 percent, and overshooting the limit in June 2013 prompted the government to cut back fuel subsidies that economists have warned for years to be detrimental to the economy. The resulting hike in fuel prices – 44 percent at one point – caused inflation to almost double from 2012.

But this year, as elections loom, no further fuel-price hikes are expected, and inflation should slow to 5 percent year-on-year by the end of 2014, the Standard Chartered note said, within the central bank’s target range of 3.5 to 5.5 percent for the year.

Recovering fundamentals will have benefits for the rupiah as well, with a stronger second half.

“The Indonesian rupiah (IDR) is likely to remain under pressure in early 2014 amid uncertainty over the election results and U.S. Fed tapering,” according to Standard Chartered. “However, we expect the IDR to strengthen in H2, reaching 11,400 by end-2014, once the election results are known and U.S. Fed tapering is in place.”
ibtimes.com

Minister: Economy to grow 5.8% to 6.1% in 2014

Finance Minister Chatib Basri says he remains optimistic that economic growth in 2014 will stand at 5.8 to 6.1 percent even though the World Bank (WB) has not revised its forecast for the country’s economic growth, which it set at 5.3 percent.

“What did the WB’s forecast look like last year? I think our forecast is much more accurate, that our economy will grow between 5.8 percent and 6.1 percent,” he said after speaking at the 2014 Indonesia Summit in Jakarta on Wednesday, as quoted by Antara news agency.

On Tuesday, the WB revised its growth forecast for the global economy for the first time in three years to 3.2 percent from 3 percent in 2014. It said such global growth might occur as the easing of austerity policies in advanced economies, such as Japan, the United States and European countries, supported their recovery from the global financial crisis.

Despite a revised growth forecast for the global economy, the WB did not revise its forecast for Indonesia.

The WB also projected that East Asia and the Pacific’s economy would grow by 7.2 percent in 2014, as in the previous year. It said East Asia and the Pacific’s economy was still affected by the global financial crisis so that this year, the region’s economy would grow at the same rate as in 2013.

Bank Indonesia (BI) projected that national economic growth in 2014 would be closer to the lower level of growth forecast of between 5.8 and 6.2 percent in line with the improved global economy.

However, BI Governor Agus Martowardojo has voiced optimism that 6 percent economic growth could still be achieved. “It’s still possible to reach the middle range of the target,” he said.
thejakartapost.com

General Economic Outline of Indonesia

Indonesia, currently the 18th-largest economy in the world, is experiencing remarkable economic growth. After the Asian Financial Crisis of the late 1990s halted a booming economy fostered by the Suharto government, Indonesian macroeconomic indicators started to come back on track in the mid 2000s.

Although the Asian Financial Crisis had disastrous consequences (especially on the poorer urban segments of society), important lessons have been learned too. The financial system for example, which to a large extent lacked supervision and transparency, was replaced by a system entailing more prudent fiscal policies in line with international economic standards, thus fostering integration with global markets. Moreover, the Asian Financial Crisis has been the catalyst for a process of political democratization and liberalization that continues up to the present.

Prudent financial macroeconomic policy is one reason why Indonesia was resilient to the global financial crisis of 2008-2009. Both public and private debt have fallen sharply (as a percentage of GDP), international reserves have grown fast and inflation has been under control. In combination with relative political stability and certain favorable demographic trends it provides opportunities for strong economic performance over the medium term. Regarding the longer term, the Indonesian government aims to be in the top six of largest global economies by the year 2030.

Another key element that accounts for Indonesia's recent economic growth is domestic consumption. In line with rising per capita GDP and low borrowing costs, Indonesia's private consumption is robust. It accounted for 56 percent of the country's economic activity in 2011 and future projections indicate that it is to grow further.

Despite such positive conditions Indonesia remains a complex country from a business, social and political perspective. We advise those that intend to invest in Indonesia to read our Risks of Investing in Indonesia page as one should be aware of matters that can negatively influence Indonesia's investment climate.

The table below shows recent results and future forecasts of important macroeconomic indicators. For a more detailed account on these indicators please visit the Macroeconomic Indicators page or click on the links in the table.

Sources: World Bank, IMF, Statistics Indonesia and CIA World Factbook

Composition of Indonesia's Economy: the three main sectors
The table below indicates a remarkable development during the last five decades in the percentage shares of the three main economic sectors (to wit agriculture, industry and services) with regard to Indonesia's Gross Domestic Product (GDP). Indonesia changed from being an economy that was highly dependent on agriculture into a more balanced economy in which the percentage share of manufacturing in the country's GDP quickly exceeded that of the agriculture sector.

This also indicates that Indonesia lessened its traditional dependency on primary exports, although it still remains relatively high today. It should also be underlined that all of these sectors underwent rapid expansion, despite the fact that its contribution to Indonesia's GDP fell (agriculture) or remained at a similar level throughout the indicated period (the services sector). For a more detailed account please click on one of the sectors in the table below.

	1965	1980	1996	2010
Agriculture	51	24	16	15
(percent of GDP)
Industry	13	42	43	47
(percent of GDP)
Services	36	34	41	37
(percent of GDP)

Indonesia's Economic Fact Sheet

• Indonesia was an USD $850 billion economy in 2012

• In 2012 private consumption accounted for about 55 percent of economic activity in Indonesia, partly due to low borrowing costs and rising GDP per capita

• Per Capita GDP rose from USD $780 in 2000 to USD $3,540 in 2011

• Exports account for around 20 percent of GDP. China, Japan, USA and India are Indonesia's largest export destinations

• Around half of Indonesia's exports consist of commodities (in particular palm oil, coal and rubber)

• In 2012 Foreign Direct Investment (FDI) in Indonesia jumped around 26 percent (to USD $29.5 billion) compared to 2011

• Mining accounted for around 12 percent of gross domestic product in 2011

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