Indonesia’s Weakest Growth in 5 Years Makes New Leader’s Task Harder
Jakarta. Indonesia’s gross domestic product grew 5.01 percent in the third quarter from a year earlier, its slowest in five years, highlighting the challenge that the new President Joko Widodo faces trying to turn around Southeast Asia’s largest economy.
Joko, who took office on Oct. 20, has set himself a target of lifting annual growth to 7 percent — the minimum economists say is necessary for the country to reach a decent standard of living before its population starts to age in 15 years’ time.
“It’s hard to see how he gets there. Exports are not going to pick up much and if he’s going to get there it’s mostly going to have to be through investment,” said Dan Martin at Capital Economics.
Bambang Brodjonegoro, Joko’s finance minister, said recently that growth wouldn’t reach 7 percent until at least 2016. Next year’s budget is based on the assumption that it will be 5.8 percent.
Stiff rises in Indonesia’s interest rates last year aimed at closing a big current-account deficit have depressed domestic demand. Fixed investment grew by just 4.02 percent in the third quarter, the slowest since 2009.
Sliding global prices for palm oil, rubber and other commodities that Indonesia produces are pinching private consumption — the main driver of growth in recent years — which expanded by 5.44 percent in the third quarter down from the previous quarter’s 5.59 percent.
Meanwhile, exports are struggling because of a slowdown in China and stagnant activity in other major markets such as Japan and Europe. In the third quarter exports fell by 0.7 percent, following declines of 0.44 percent in the first quarter and 1.04 percent in the second.
The rupiah eased to the session low of 12,115 per dollar, down 0.1 percent, after the weaker-than-expected growth data. The median forecast from a Reuters poll of analysts had expected growth to fall to 5.10 percent in the third quarter from 5.12 percent in the second.
Joko has few options to stimulate the economy.
A 25 percent drop in oil prices since June has reduced the pressure that energy subsidies place on the budget, but the scope for pump-priming is still “very limited”, said economist Wai Ho Leong at Barclays bank.
To free up funds for public investment in infrastructure, Joko plans to slash subsidies by raising retail fuel prices. This is a “crucial step” towards a “new trend level of growth”, said Leong. However, in the short term it will hit consumers’ disposable income, although handouts will soften the blow for the poorest.
Bank Indonesia, the central bank, is likely to raise interest rates again when US ones start to increase, which many expect by mid-2015, to prevent capital outflows and a plunge in the rupiah. And it may act sooner if higher fuel prices cause inflation to spike.
A former furniture salesman from outside the political establishment, who gained popularity as governor of Jakarta before becoming president, Joko aims to boost private investment by making it simpler to do business.
Far-reaching reforms will require the assent of parliament, where the opposition controls a majority of the seats and all of the committees — influential in deciding when bills are read and their small print.
Still, Joko’s government could accomplish much by implementing existing laws, such as one to remove the obstacles investors face acquiring land and another to remove strangling red tape, said Kevin O’Rourke, a political analyst.
Under Joko’s consensus-seeking predecessor, Susilo Bambang Yudhoyono, “parliament seemed more important than it really was”, said O’Rourke. “Widodo will be much more willing to use the powers of the presidency in disregard of parliament” to implement his programs.
Indonesian consumers are expecting things to get better in the next six months, a survey by the central bank showed on Tuesday. The consumer confidence index was 120.6, the highest reading ever.
To achieve his growth target, Joko “needs to show how he’s going to get investment projects going and demonstrate why people should get excited about Indonesia again,” said Martin at Capital Economics.
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