The economy of Indonesia expanded 5.02 percent year-on-year (y/y) to IDR 8,354 trillion (USD $664 billion) in 2014, the nation’s slowest annual growth pace since 2009, according to the latest data from Statistics Indonesia (BPS). As such, GDP growth failed to achieve the central government’s 5.5 percentage point growth target that was set in the 2014 State Budget. Indonesia’s economic growth has been slowing since 2011 when it still posted a 6.5 percentage point growth rate (y/y). However, growth is expected to rebound from here.
There are a number or reasons - both external and domestic - that explain why Indonesia’s economic expansion slowed to 5.02 percent in 2014.
• Weak export performance; due to sluggish global economic growth demand for Indonesian commodities has fallen in 2014 (and as demand falls so do commodity prices). Therefore, foreign exchange earnings from commodities such as palm oil, rubber, coal and tin have been limited. Indonesia also implemented a ban on exports of unprocessed minerals in January 2014 (part of the 2009 New Mining Law) in an effort to boost domestic downstream industries and raise future revenues from the country’s natural resources. However, as there is currently a lack of domestic smelting facilities the export ban has resulted in falling mineral ore exports from Southeast Asia’s largest economy. Exports of goods and services, which account for about 24 percent of the economy, experienced the slowest growth pace at 1.02 percent in 2014 (from 5.3 percent in the preceding year).
• Political uncertainty; the year 2014 was a ‘political year’ for Indonesia as the legislative and presidential elections were held. Contrary to initial expectations, both elections - particularly the presidential election - were a tight race and signaled a fragmented society. This tight race triggered severe political uncertainty and thus harmed the country's investment climate. Presidential candidate Prabowo Subianto, a controversial former army general, came close to winning and once defeated by Joko Widodo he seemed reluctant to acknowledge his defeat challenging the result at the Constitutional Court. The political year made foreign investors careful and to wait & see first before committing oneself to costly investments. Therefore growth of gross domestic fixed capital formation slowed to 4.12 percent (y/y) in 2014, from 4.71 percent (y/y) in 2013.
• Higher interest rate environment; in response to accelerated inflation (caused by higher subsidized fuel prices implemented by the government in June 2013 and November 2014), Bank Indonesia raised its key interest rate (BI rate) gradually yet aggressively from 5.75 percent in June 2013 to 7.75 percent in November 2014. The higher interest rate environment was also a strategy of the central bank to curb the country’s wide current account deficit (which stood at 3.3 percent of GDP in 2013), limit capital outflows amid monetary tightening in the USA, and support the rupiah exchange rate which started depreciating sharply from mid-2013. As such, Indonesian authorities chose to safeguard Indonesia’s fiscal and financial fundamentals at the expense of higher economic growth. As a result of weaker purchasing power, household spending (accounting for about 56 percent of total economic growth) slowed to a growth pace of 5.14 percent (y/y) in 2014, from 5.28 percent (y/y) in 2013.
Looking forward, economic growth of Indonesia is expected to have hit its lowest point and will rebound from here despite the still sluggish global economy (giving rise to low commodity prices) and the relatively high interest rate environment set by Bank Indonesia (in fact the BI rate may be hiked again ahead of looming higher US interest rates later this year). Moreover, Indonesia is still plagued by a wide current account deficit (at an estimated 3 percent of GDP in 2014) but one that is expected to have improved in 2014. Optimism about accelerating economic growth of Indonesia is primarily based on President Joko Widodo’s commitment to implement structural reforms (such as the scrapping of fuel subsidies) in a move to boost economic and social development in Southeast Asia's largest economy. His commitment will for sure have a positive impact on foreign investors’ assessment of the Indonesian economy.
Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Currency translation in the first line is wrong.
IDR 8,354 trillion ≠ USD 664 million.
Correct figure is USD 664 BILLION.