Statistics Indonesia (BPS) announced on Tuesday (05/08) that Indonesia’s economy grew 5.12 percent in the second quarter of 2014 from the same quarter last year. This means that gross domestic product (GDP) growth of Indonesia has continued the slowing trend it has been experiencing since 2011. The 5.12 percentage point GDP growth in Q2-2014 is the slowest growth pace that has been recorded by Southeast Asia’s largest economy since the fourth quarter of 2009. What explains this slowing economic growth of Indonesia?
Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Gross Domestic Product of Indonesia 2006-2013:
(in billion USD)
(annual percent change)
|GDP per Capita
Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)
The two main factors that explain the slowing economic growth pace in Q2-2014 are declining investments and exports. The former slowed to a growth pace of 4.5 percent (yoy), while the latter fell 1 percent (yoy). Investments and exports have been feeling the impact of monetary tightening and new mining policies.
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 introduced 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 allows mining giant Freeport Indonesia to resume copper concentrate exports.
Trade Balance of Indonesia (in USD million):
Moreover, GDP growth has been limited as Indonesia’s financial stability has been prioritized at the expense of higher economic growth. The central bank of Indonesia (Bank Indonesia) introduced a tighter monetary policy in 2013 amid a chaotic period when massive capital outflows occurred amid the looming ending of the US Federal Reserve’s stimulus program (quantitative easing), leading to sharp rupiah depreciation. Bank Indonesia raised its benchmark interest rate (BI rate) gradually between June 2013 and November 2013 from 5.75 percent to 7.50 percent. This tighter policy was conducted in order to combat capital outflows, reduce the country’s wide current account deficit (which hit a record high at USD $9.9 billion or 4.4 percent of GDP in the second quarter of 2013), to combat high inflation (which accelerated sharply after the government introduced higher prices for subsidized fuels in June 2013), and to support the rupiah exchange rate (which depreciated over 25 percent over the course of 2013 due to the looming end of US quantitative easing).
Bank Indonesia is not expected to lower the BI rate anytime soon as looming US interest rate hikes in 2015 can lead to capital outflows again. Moreover, the country's current account deficit is still troublesome although having improved from last year. In the first quarter of 2014, this deficit amounted to USD $4.2 billion, or 2.03 percent of the country’s GDP. As the interest rate environment in Indonesia will stay relatively high in the foreseeable future, GDP growth will remain limited as well.
Current Account Balance Indonesia (in USD million):
Government spending was also disappointing (particularly considering that the legislative and presidential elections typically trigger increased public spending). This performance was partly influenced by cuts in ministerial budgets (to avoid a budget shortfall caused by expensive subsidized fuel costs) but also because a number of ministers were campaigning in the context of these elections and thus led to a stop to the flow of ministerial funds (lower positioned staff at the ministries were hesitant to spend these funds, thus leading to a delay in projects spending).
All sectors within Indonesia’s USD $868 billion economy expanded in the second quarter of 2014 except for mining & quarrying (which fell 0.15 percent year-on-year). Meanwhile, household consumption remains to form the pillar of economic growth in Indonesia, expanding by 5.6 percent (year-on-year) in the second quarter. Household consumption accounts for 55.79 percent of the country’s total economy and thus also forms an important reason for foreign investors to invest in Indonesia.
Suryamin, Head of Statistics Indonesia, said that the economy of Indonesia was supported by an improving global economy in the second quarter. Five countries (or regions) have a particular large influence on Indonesia. These are the USA, Japan, China, Eurozone and India. As such, the recovering US economy and enhanced economic activity in the Eurozone have been able to give a positive boost to Indonesian GDP growth.
BPS also announced that it has revised Q1-2014 Indonesian GDP growth to 5.22 percent year-on-year (from 5.21 percent previously).
At the year-end, total Indonesian economic growth is expected to reach about 5.2 percent.