Statistics Indonesia (BPS) announced today (05/08) that the Indonesian economy grew 4.67 percent (y/y) in the second quarter of 2015, the slowest pace since 2009. However, the result was in line with expectation. Most analysts assumed that economic growth would continue to slow as there has been no rebound in global commodity prices, interest rates remained high, people’s purchasing power weakened, government spending remained problematic, companies Q2-2015 earnings reports were not too good, and manufacturing contracted.
On a non-seasonally adjusted basis, Indonesia’s Q2-2015 gross domestic product (GDP) expanded 3.78 percent from the preceding quarter. Meanwhile, Indonesia’s economic growth in Q1-2015 was revised to 4.72 percent (y/y) from 4.71 percent (y/y) previously.
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
What are the Factors that Caused the Continuation of Indonesia’s Slowing Economic Growth?
The economy of Indonesia is integrated into the world economy and therefore the country feels the negative impact of sluggish global growth. The International Monetary Fund (IMF) recently cut its forecast for global economic growth to 3.3 percent (y/y) in 2015, primarily due to weak economic performance in the USA caused by bad weather. However, slowing economic growth in China (a key trading partner of Indonesia) is a bigger problem for Indonesia as China’s slowdown has led to heavily falling commodity prices. Therefore, Indonesia’s export performance has deteriorated markedly as the country constitutes a key commodity exporter. Revenues generated through exports of coal, crude palm oil (CPO), nickel and various other commodities have plunged in recent years, and there are no signs of a rebound occurring anytime soon. China’s economy grew at 7 percent (y/y) in the first half of 2015 as a result of cyclical and structural readjustments.
Although it is positive that Indonesia recorded a USD $477 million trade surplus in June 2015, the country’s seventh straight monthly trade surplus, it is worrying that both exports and imports have dropped sharply over the past year, indicating that global and domestic demand has been deteriorating. Indonesia’s June exports fell 12.8 percent (y/y) to USD $13.4 billion, while imports fell 17.4 percent (y/y) to USD $12.9 billion.
Weak export performance is partly responsible for Indonesia’s wide current account deficit and amid the tighter monetary policy approach of the US Federal Reserve (since 2013) Indonesia has been plagued by capital outflows as countries that are plagued by wide current account deficits are generally considered too risky. Indonesia’s current account deficit is expected to be 2.3 percent of GDP in Q2-2015. In order to combat the wide current account deficit, the Indonesian government largely scrapped its fuel subsidy program in order to curtail costly oil imports. However, a (temporary) side effect of this structural reform is that inflation has accelerated sharply (7.26 percent y/y in July 2015). High inflation, the wide current account deficit, and sharply depreciating rupiah rate (since 2013) imply that Indonesia’s central bank has limited room (or none at all) to cut its current relatively high interest rate regime. The central bank’s key interest rate (BI rate) is currently at 7.50 percent.
High domestic interest rates cause that Indonesia’s purchasing power declines, thus domestic consumption (a key pillar of economic growth as it accounts for about 55 percent of the country’s total economic growth) reduces accordingly. According to data from BPS, household consumption in Indonesia slowed to 4.97 percent from 5.01 percent in the same quarter last year.
Meanwhile, government spending was plagued by delays brought about by a budget revision (triggered by the fuel subsidy reform) which needed approval from the House of Representatives (DPR), and organizational changes in several government offices. In the first six months of 2015 the Indonesian government only spent 11 percent of its USD $20 billion infrastructure budget. However, according to the latest news stories, government spending has picked up since May 2015. Especially government-led infrastructure development is regarded as an important strategy to boost economic growth in the remainder of 2015. Based on data from BPS public sector spending fell to 2.28 percent (y/y) in Q2-2015 from 2.71 percent in the same quarter last year.
Several days ago it was reported that manufacturing activity in Indonesia contracted for the 10th straight month in July 2015 as new orders declined. The Nikkei/Markit purchasing manager’s index (PMI) fell 0.5 points to 47.3 (from 47.8 in June), remaining below the level of 50 points that separates contraction from expansion. As a consequence, Indonesian factories shed jobs at the fastest pace since the survey started in 2011. Continued contraction in the country’s manufacturing industry is not the best way to start the first month of the third quarter.
It is not impossible for Indonesia to post +5 percent (y/y) GDP growth in 2015. However, this will require serious efforts from the government while an improving global context would be highly welcome.