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Indonesia economy posts slowest growth in nearly 5 years

Publication Date : 06-05-2014

 

Indonesia, one of the world’s most resilient economies, saw its gross domestic product (GDP) growth slow far below expectations in the

first quarter of this year, due to plunging exports — partly as a result of a new rule banning mineral ore exports — in addition to signs that monetary and fiscal tightening may have gone too far.

The Central Statistics Agency (BPS) reported Monday that Indonesia’s economic growth stood at 5.2 per cent in the first quarter of 2014, compared to 5.7 per cent the previous quarter.

For Indonesia, a country that was recogniSed by McKinsey & Company as the world’s most stable economy, the 5.2 per cent economic growth in the first quarter was the

slowest in almost five years, after it grew by only 4.2 per cent in the third quarter of 2009, when Indonesia felt the pinch of the US financial crisis.

“The slowdown is part of our strategy to reduce our current-account deficit, but our initial expectation was that the economy shouldn’t grow too slowly; it should be at least above 5.5 per cent,” Finance Minister Chatib Basri wrote in a text message.

Exports, which account for 24 per cent of Indonesia’s GDP, contributed most to the slowdown, as they contracted by 0.8 per cent year-on-year, according to BPS data.

Meanwhile, consumption and investments — the country’s two main growth drivers — expanded by 5.6 per cent and 5.1 per cent, respectively.

BPS head Suryamin noted that the recently implemented ore export ban had caused a 77 per cent year-on-year decline in shipments of mined raw commodities.

The new GDP data suggests that Indonesia’s economic growth this year may not be as strong as previously estimated by policymakers, at between 5.5 per cent and 6 per cent, according to economists.

Bank Danamon has revised down its GDP growth forecast this year to 5.31 per cent — from 5.7 per cent previously — and Citi Research maintained its forecast around the same level.

“Today’s data is not indicative of a forthcoming free fall in growth,” said Helmi Arman, an economist with Citi Research, brushing off concerns.

Economists have also attributed the recent slowdown to the fiscal and monetary tightening performed by the government and Bank Indonesia (BI).

Last year, the Finance Ministry hiked import taxes, while the central bank increased its key interest rate by 175 basis points to 7.5 per cent, the highest level in four years, both of which could slow consumption in the domestic consumption-dependent economy.

However, the worse-than-predicted slowdown in economic growth provided a case for the government to exert greater efforts toward pushing up exports and investments,

Deputy Finance Minister Bambang Brodjonegoro said.

Meanwhile, BI Senior Deputy Governor Mirza Adityaswara said that the central bank “will monitor trends in inflation, the current account and economic growth” when deciding its future monetary policy.

Previously, BI rarely mentioned economic growth in its policy outlook. In his speech during the annual Bankers’ Dinner in November, BI Governor Agus Martowardojo said the BI rate would be constantly adjusted to manage inflation and push down the current-account deficit, without mentioning economic growth.

“With growth significantly missing expectations, it is nearly guaranteed that the calls for Bank Indonesia to cut rates will become louder by the day,” said Wellian Wiranto, an economist with the OCBC Bank in Singapore.


 

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