Economic Growth of Indonesia in Second Half 2014: Slowing or Growing?

Although from a domestic perspective recent Indonesian GDP growth is disappointing as the growth pace has been declining for three consecutive years, from a global perspective, the figure of +5 percent growth is solid. Particularly considering that global economic growth is still sluggish (the International Monetary Fund expects the global economy to expand 3.4 percent in 2014 from 3.2 percent in the previous year) and which has negatively impacted on Indonesian exports such as coal and crude palm oil. Meanwhile, the central bank of Indonesia (Bank Indonesia) as well as the Indonesian government have deliberately blocked higher economic growth in an effort to safeguard the country’s financial fundamentals. For example higher subsidized fuel prices were introduced in June 2013 to relieve the government’s budget deficit and combat the widening current account deficit. To tackle high inflation, which resulted from the higher fuel prices, Bank Indonesia gradually raised its benchmark interest rate (BI rate) from 5.75 percent in June 2013 to 7.50 percent in November 2013. This resulted in slowing credit growth. In recent years, credit growth in Indonesia had grown at +20 percent (yoy) levels but for 2014 Bank Indonesia targets credit growth in the range of 15 to 17 percent (yoy). In late 2013, the central bank also set new minimum down payment rules for second properties. The loan-to-value (LTV) ratio for the purchase of a second property was reduced to 60 percent and 50 percent for purchases beyond the second property, meaning that buyers need to pay a down payment of 40 percent for a second property and 50 percent for additional homes.

Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV
2014	5.22	5.12
2013	6.03	5.89	5.62	5.78
2012	6.29	6.36	6.16	6.11
2011	6.45	6.52	6.49	6.50
2010	5.99	6.29	5.81	6.81
2009	4.60	4.37	4.31	4.58

^{Source: Statistics Indonesia (BPS)}

Gross Domestic Product of Indonesia 2006-2013:

	2006	2007	2008	2009	2010	2011	2012	2013
GDP (in billion USD)	285.9	364.6	432.1	510.2	539.4	706.6	846.8	878.0
GDP (annual percent change)	5.5	6.3	6.1	4.6	6.1	6.5	6.2	5.8
GDP per Capita (in USD)	1,643	1,923	2,244	2,345	2,984	3,467	3,546	3,468

^{Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)}

Regarding exports, Indonesia felt the impact of the recent ban on exports of unprocessed minerals and metals (implemented on 12 January 2014). This policy, part of the 2009 Mining Law, was implemented to support the establishment of local processing facilities (which should result in value-added revenues in the future as currently most of these processing facilities are still under construction). However, for the short-term it means that this ban will burden the country’s trade balance. In the first half of 2014, Indonesia’s trade deficit amounted to USD $1.16 billion. For the remainder of 2014, exports may improve as the government has allowed mining giant Freeport Indonesia to resume copper concentrate exports.

Despite the higher interest rate environment in Indonesia, household consumption is expected to remain the pillar of economic growth in the second half of 2014. Household consumption accounted for 55.79 percent of Indonesia’s USD $868 billion economy in the second quarter of 2014 and thus forms an important reason for foreign investors to invest in Indonesia. However, the problem with household consumption is that it has limited impact on poverty eradication and therefore the government should not solely rely on this consumption. Growth of agriculture and labor-intensive industries would have a much bigger impact (multiplier effect) on poverty eradication.

Whether economic growth can accelerate in the second half of 2014 will also depend on realization of government expenditure. Recent reports, however, indicate that government spending (set in the 2014 State Budget) has not been optimal. This is indeed a traditional problem in Southeast Asia’s largest economy but has become more problematic amid the country’s legislative and presidential elections that were held in April and July 2014, respectively. Optimal government spending can add 0.1 to 0.2 percentage points to GDP growth in the second half. Historically, the government increases spending at the end of the year and therefore GDP growth results in the third and fourth quarter may be better than those in the first two quarters of the year.

Foreign direct investments are also believed to rise slightly only in the second half of 2014 as investors prefer to wait and see for the new government first. The new government, led by newly elected President Joko Widodo (Jokowi) will be inaugurated in October 2014. Currently, the country's Constitutional Court (Mahkamah Konstitusi) is handling the case that was brought forward by defeated presidential candidate Prabowo Subianto. According to Subianto, massive fraud and violations influenced the final election result of Indonesia's General Elections Commission (KPU). The Court will give its ruling in the last week of August 2014 but few expect that it will rule in favour of controversial former army general Subianto.

If the government will initiate further steps aimed at reducing consumption of subsidized fuels in the second half of 2014, then GDP growth may slow further to 5.1 percent. Particularly if this is joined by a higher BI rate (in an attempt to combat inflationary pressures brought on by the subsidized fuel policy as well as looming US interest rate hikes in 2015).   

The Indonesian government still targets GDP growth of 5.5 percent in 2014 but this is an unrealistic target. Presumably, this target was set unrealistically high for political reasons.

‹ Back to News Columns

Discuss

Please sign in or subscribe to comment on this column