After Statistics Indonesia (BPS) had announced on Monday (05/05) that Indonesia's gross domestic product (GDP) grew by 5.21 percent year-on-year (yoy) in the first quarter of 2014 (considerably below analysts' projections of around 5.6 percent), concerns have risen about the country's economic expansion for the remainder of the year. The government of Indonesia targets a GDP growth rate of between 5.8 and 6.0 percent (yoy). However, several international institutions do not agree with this optimistic target.
The International Monetary Fund (IMF) expects the economy of Indonesia to expand by 5.4 percent in 2014, followed by a 5.8 percentage growth pace in 2015, while the World Bank stated in its March 2014 edition of the Indonesia Economic Quarterly that it projects a 5.3 percentage growth rate for Southeast Asia's largest economy in 2014. Both institutions downgraded their forecasts for economic growth in Indonesia due to the uncertain international context (further US Federal Reserve tapering leading to capital outflows from emerging markets as well as slowing economic growth in China, an important trading partner of Indonesia), slowing domestic consumption (as Bank Indonesia gradually raised its benchmark interest rate last year in order to curb high inflation and to ease the country's wide current account deficit), and lastly, sluggish exports (due to continued weak global demand and Indonesia's recently introduced ban on exports of unprocessed minerals).
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)
As such, the economic slowdown in Southeast Asia's largest economy is partly self-inflicted. The government and central bank stepped on the brakes of economic growth in order to safeguard the country's financial make-up and provide room for higher future economic growth. After the government raised prices of subsidized fuels by an average of 33 percent in June 2013, the central bank was forced to raise its benchmark interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2013 to combat high inflation. Hiking subsidized fuel prices was (and still is) needed to relieve the government's budget deficit as it needs to import expensive oil to meet domestic fuel demand. These oil imports are also an important reason why the current account deficit hit a record high in the second quarter of 2013 (USD $9.9 billion or 4.4 percent of GDP). Because Indonesia's oil sector has been in a state of decline for over a decade, the government has increasingly needed to rely on oil imports. Lastly, the ban on exports of unprocessed minerals, which came into effect on 12 January 2014 is intended to change Indonesia from a mainly raw commodities exporter into an exporter of value-added products. This may become an advantage in the future but for the short-term it should result in declining exports (although under certain strict conditions mineral ore exports are still allowed up to 2017) because there is a current lack of domestic smelting capacity to produce value-added products. However, in February and March 2014 Indonesia recorded a trade surplus and therefore the impact of the ban may not be as big as previously expected.
Apart from the previously mentioned factors that influenced the macroeconomy of Indonesia, low realization of government spending in Q1-2014 was also cited as a reason for slowing economic growth.
Indonesia's economic growth in the second and third quarters is expected to accelerate due to the holy Islamic fasting month (Ramadan) and subsequent Idul Fitri celebrations. These Islamic events always trigger higher demand for products such as clothes, shoes and food. However, the result of the presidential election, scheduled for 9 July 2014, will influence GDP growth as well. If the newly elected president and vice-president (who run as a fixed inseparable pair in the election) will enjoy 'market approval' then productivity as well as investments are expected to increase from the third quarter of 2014 onward. However, the opposite can happen if the market and investors do not agree with the people's choice.
With the country's household consumption relatively curbed (although still growing) due to the higher interest rate environment and exports being flat (in Q1-2014 Indonesian exports accounted for 23.7 percent of total economic growth, down from 24.3 percent in 2012 and flat from the 23.7 percent result in 2013), the main key for improved economic growth for the remainder of 2014 lies in government expenditure (or government consumption). In Q1-2014, government expenditure accounted for 6.8 percent of the country's total economic growth, significantly down from 9.1 percent in 2013 or 11.5 percent in Q4-2013. The decline of government expenditure in this year's first quarter was probably the result of the government's focus on the legislative election that was held on 9 April 2014. If the government can enhance spending in the next quarters on productive matters - particularly in combination with a newly elected president who has the trust of the market - then GDP growth can accelerate and approximate the growth target of the government (5.8 to 6.0 percent).
Suryamin, Head of Statistics Indonesia, added that slowing growth in the first quarter was caused by a decline in production of food products due to bad weather amid a peak of the rainy season, leading to floods in several regions.
In terms of geography, the economy of Indonesia continues to be dominated by the western part, particularly Java, Indonesia's most populous island. Java accounts for 58.5 percent of Indonesia's total GDP, followed by Sumatra with 23.9 percent. Thus, these two most western-located (major) islands account for approximately 82 percent of the country's total GDP. The outer islands, located in the eastern region are much less densely populated and are situated in a more-or-less economic vacuum.
Regional Contribution to GDP Growth:
|Island|| First Quarter 2014
Contribution to GDP (%)
Source: Statistics Indonesia (BPS)