A quick look at the data that were released today by Indonesia's Statistics Agency (BPS) shows that economic acceleration in the third quarter was particularly supported by improved spending by the Indonesian government. Government spending had been alarmingly weak in the first half of 2015 as the government had only spent roughly 34 percent of its 2015 budget by June (this was also caused by budget revisions and organizational changes at the government level). Earlier this week, Indonesian President Joko Widodo informed that government spending realization had doubled to 70 percent of the budget by October.

Government spending rose 6.56 percent (y/y) in the third quarter, accelerating from a pace of 2.28 percent (y/y) in the preceding quarter. Household consumption (which contributes roughly 55 percent to the economy) rose 4.96 percent (y/y) in Q3-2015, almost unchanged from the 4.97 percent (y/y) growth pace in the second quarter. Meanwhile, investment spending growth accelerated 4.62 percent (y/y), from 3.55 percent (y/y) in the previous quarter.

Indonesia's Quarterly GDP Growth 2009-2015 (annual % change):

 Year    Quarter I
   Quarter II    Quarter III    Quarter IV
 2015        4.72        4.67         4.73
 2014        5.14        5.03         4.92         5.01
 2013        6.03        5.81         5.62         5.72
 2012        6.29        6.36         6.17         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)

Macroeconomic Indicators Indonesia, 2009-2015:

    2009   2010   2011   2012    2013    2014    2015
Gross Domestic Product²
  (annual percent change)
   4.6    6.4    6.2    6.0     5.6     5.0     4.8¹
• Consumer Price Index
  (annual percent change)
   4.8    5.1    5.4    4.3     8.4     8.4     3.0¹
Exchange Rate
10,389  9,074  8,773  9,419  11,563  11,800  13,500¹
Current Account Balance 
(percent of GDP)
     0.7    0.2   -2.8    -3.3    -2.9    -2.5¹
• Population
  (in millions)
    241   244   247    250    253    255¹
• Poverty
  (percent of population)
  14.2   13.3   12.5   11.7    11.5    11.0    11.2³
  (percent of work force)
   7.9    7.1    6.6    6.1     6.3     5.9     5.8³
• Foreign Exchange Reserves
  (in billion USD)
  66.1   96.2  110.1  112.8    99.4   111.9   101.7

¹ indicates a forecast
² Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
³ February 2015 data

Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)

Initially the government targeted economic growth of 5.7 percent (y/y) in the 2015 State Budget. After three quarters have passed we can now conclude that it will require an impressive performance in the last quarter to even reach the 5 percent (y/y) growth mark for full-year 2015. In September and October, the Indonesian government announced a series of economic stimulus programs (involving matters such as deregulations and tax breaks). Perhaps these stimulus measures can boost the Indonesian economy in the fourth quarter. However, we doubt to see a Q4-2015 GDP growth figure above 5 percent (y/y) despite government spending usually increasing in the last quarter. Indonesia's recent GDP growth performance shows that the country's economic rebound is gradual and slow.

What are the Factors that Cause Indonesia's Sluggish Economic Growth?

Low Commodity Prices & Sluggish Global Growth; Indonesia's export performance is highly dependent on the export of (mainly raw) commodities such as coal, crude palm oil and mineral ores. Commodity shipments account for over half of the country's total exports. However, due to sluggish global economic growth, particularly China's slowdown, demand for commodities has declined, hence commodity prices declined accordingly. In the first nine months of 2015, Indonesian exports contracted 13.3 percent (y/y) to USD $115.1 billion, while imports fell 19.7 percent (y/y) to USD $107.9 billion. Such weakening import and export figures show that global and domestic economic activity has declined over this period.

Last month, the International Monetary Fund (IMF) cut its forecast for global economic growth in 2015 by 0.2 percentage point to 3.1 percent (y/y) due to the persistent slowdown in emerging markets and an estimated weaker recovery in advanced economies. Sluggish global growth, particularly China's slowdown (being the key trading partner of Indonesia), causes falling overseas demand for Indonesian exports.

High Interest Rates; the central bank of Indonesia (Bank Indonesia) still upholds a relatively high benchmark interest rate (7.50 percent) in order to push inflation back to the central bank's target range (3-5 percent y/y) and enhance sustainability of the country's current account balance. Moreover, the higher interest rate environment supports the fragile rupiah ahead of looming higher US interest rates. As such, Bank Indonesia prefers financial stability over accelerated economic growth as the higher interest rate curtails credit growth and economic activity. Given that Indonesia's inflation and current account balance have improved, Bank Indonesia seems to have room for an interest rate cut in either November or December.

The Indonesian government targets a 5.3 percent GDP growth rate in 2016. Indonesian Finance Minister Bambang Brodjonegoro said the government will focus on infrastructure projects to boost growth in 2016. However, we believe that achieving the 5.3 percent target requires an improvement in external conditions.

Further Reading:

Gross Domestic Product of Indonesia
Economy of Indonesia: GDP Growth Slows to 4.67% y/y in Q2-2015