Indonesia’s economic growth in the first quarter of 2015 was recorded at 4.71 percent (y/y). Although it had been expected that Indonesia’s GDP growth figure would slip below the five percent mark, the slowdown was worse than initially expected. Suryamin, Head of Statistics Indonesia (BPS), stated earlier today (05/05) that the country’s economic growth slowed to a five-year low on the back of weak exports (the result of reduced economic growth in export markets) and lower crude oil prices.
The 4.71 percent (y/y) growth pace in Q1-2015 means that Indonesia’s slowing economic growth trend - that started from 2011 - continued into 2015 despite high hopes that Indonesian President Joko Widodo could manage to reverse this trend. The government set a 5.7 percent (y/y) GDP growth target in the 2015 state budget but it is now highly unlikely that such a growth target can be achieved. The World Bank estimates that Indonesia’s economic growth will be about 5.2 percent (y/y) in 2015. The International Monetary Fund (IMF) projects Indonesia's 2015 GDP growth at 5.3 percent (y/y). A more realistic government GDP growth target would make matters more credible to foreign investors.
On a quarterly basis, GDP contracted 0.18 percent from the previous quarter. Since the last quarter last year, Statistics Indonesia uses 2010 GDP as its basis for the GDP calculation.
Weak Indonesian Exports
Due to the sluggish global economy, demand for Indonesian products has declined. Commodity prices have plunged sharply in recent years and Indonesia - a large commodity exporter - has been feeling the negative consequences. Particularly slowing economic expansion in China, the world’s second-largest economy, impacts on Indonesia’s export performance as exports to China account for nearly one-tenth of total Indonesian exports. China’s economic growth slowed from 7.4 percent (y/y) in the fourth quarter of 2014 to 7.0 percent (y/y) in the first quarter this year. Meanwhile, another important trading partner, Singapore, saw its economic growth pace slow to 2.1 percent (y/y) in Q1-2015 from 4.9 percent (y/y) in the preceding quarter.
As a result of slowing economic growth in important trading partners, the export performance of Indonesia has weakened accordingly. In the first quarter of 2015, Indonesia’s exports fell 11.7 percent (y/y) to USD $39.1 billion. Despite this weakening export performance, Indonesia managed to post a trade surplus of USD $2.43 billion in the first three months of 2015 as domestic demand for imports also weakened signalling reduced economic activity in Indonesia.
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Over-dependence on raw commodity exports (implying being highly susceptible to volatile commodity prices) is one of the reasons why the Indonesian government introduced tighter regulations in the natural resources sector (for example by banning exports of mineral ores through the 2009 Mining Law, instead forcing miners to refine - add value to - these commodities domestically before export is allowed). However, as Indonesia currently has insufficient smelting capacity, these tighter regulations put more pressure on the country's export performance.
Since the country’s export performance is expected to remain weak in the foreseeable future, President Widodo sees infrastructure development and other (foreign and domestic) investment as the main drivers of economic growth in the period ahead. Although markets have been disappointed with the number of government-led infrastructure projects that have seen groundbreaking over the past two quarters since Widodo has been in charge, it is expected that we will see the start of more infrastructure projects starting from Q2-2015.
As such, it is also estimated by most analysts that Indonesia’s economic slowdown has now seen its lowest point and will accelerate from here onwards. However, such acceleration will not be rapidly but more likely is to hover near the 5 percent (y/y) mark in the next few quarters.
Indonesia's Relatively High Interest Rate Environment
Apart from weak exports amid the sluggish global economy, another ‘obstacle’ to economic growth is that Indonesia’s central bank (Bank Indonesia) still upholds a relatively high interest rate environment with its key rate at 7.50 percent, hence limiting people's purchasing power. However, due to high inflation (6.79 percent y/y in April 2015), the country’s wide current account deficit, and looming capital outflows ahead of higher US interest rates Bank Indonesia cannot cut its interest rate drastically to support domestic economic expansion.
Java, Indonesia’s most populous island and center of national politics, is still the dominant economy within the archipelago. Java accounted for 58.3 percent of Indonesia’s total GDP in Q1-2015, followed by Sumatra (22.6 percent) and Kalimantan (8.3 percent).
As a result of the weak GDP growth data, the Indonesian rupiah fell to a five-week low today (05/05). Based on the Bloomberg Dollar Index, Indonesia’s currency had depreciated 0.38 percent to IDR 13,036 per US dollar by 15:15 pm local Jakarta time. The rupiah is the worst-performing Asian currency so far this year, weakening about 5 percent against the greenback. However, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR), which was announced before the release of Q1-2015 GDP data, appreciated 0.22 percent to IDR 12,993 per US dollar on Tuesday (05/05).