Analysis of Indonesia's 5.78% Economic Expansion in 2013

In the second quarter of 2013, Indonesia's current account deficit reached an unsustainable level of 4.4 percent of GDP (USD $9.9 billion). This deficit was partly responsible for the sharply depreciating rupiah exchange rate (which fell over 21 percent against the US dollar last year). One of the major problems that burdened the country's trade deficit and state budget was the ever-increasing import of expensive oil (to meet Indonesia's rising fuel demand amid a rapidly expanding economy). As a significant level of fuel is subsidized by the government, it seriously disrupted the country's finances. Despite facing political risks, the government finally decided to raise prices of subsidized fuels in June 2013 (although fuel subsidies still remain relatively high today), a measure which was praised by various international institutions but also led to sharply accelerating inflation in the months June, July and August. As high inflation hollows private consumption, which accounts for about 55 percent of Indonesia's GDP growth, its impact on the nation's economy is immediately felt.

Moreover, Bank Indonesia needed to raise its benchmark interest rate (BI rate) from a historic low of 5.75 percent in June 2013 to 7.50 percent by the end of 2013 in order to combat high inflation, which accelerated nearly 9 percent (yoy). The central bank's higher interest rate results in cheaper exports and more expensive imports, thus having a good impact on the trade balance, current account balance and rupiah exchange rate. The rupiah, which started to depreciate sharply after Ben Bernanke began speculating about an end to the US quantitative easing program in late May 2013, was allowed to weaken by Bank Indonesia in accordance with its fundamentals (instead of using the country's foreign exchange reserves in a futile effort to support the currency). Meanwhile, the government also implemented several fiscal policies (such as tax measures) to support exports while limiting imports.

Amid an uncertain global environment - as the gradual winding down of the Federal Reserve's quantitative easing program has led to capital outflows from emerging economies - Indonesia has been prioritizing to safeguard financial stability in order to maintain investors' confidence in Southeast Asia's largest economy. A strategy that comes at the expense of short-term economic growth but should support longer-term stability and growth.  

In 2013, all sectors of the Indonesian economy posted growth. Highest growth was recorded in the country's transportation and communication sector (+10.2 percent). Private spending rose 5.3 percent and still accounts for most of Indonesia's economic growth. Meanwhile, investment rose at a smaller pace at 4.7 percent compared to 9.8 percent in the previous year. Government spending rose 4.9 percent (mainly caused by over-budgeting on fuel subsidies spending).

Forecasts for GDP growth in 2014 seem to indicate further slowing to about 5.6 percent as the higher interest rate environment provides an unconducive climate for economic growth. In fact, in the first quarter of 2014, Bank Indonesia may raise its BI rate one more time because inflation is still high at 8.22 percent (yoy) as well as in anticipation of further Federal Reserve tapering. Indonesia's economic expansion in 2014 can also be negatively affected by slowing growth in China.

Indonesia's Economic Growth 2009–2013 (annual percentage change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV	Full Year
2013	6.05	5.83	5.62	5.72	5.8
2012	6.29	6.36	6.16	6.11	6.2
2011	6.45	6.52	6.49	6.50	6.5
2010	5.99	6.29	5.81	6.81	6.1
2009	4.60	4.37	4.31	4.58	4.6

^{Source: Statistics Indonesia (BPS)}

Further Reading:

• Analysis: What Caused Indonesia's Slowing Economic Growth in 2013
• Indonesia's Chamber of Commerce: Economic Growth Will Slow in 2014
• Chatib Basri Comments on Indonesia's Economic Performance in 2013
• Amid Improving Global Economy, Indonesia Optimistic about GDP Growth
• Overview and Analysis of Indonesia's Gross Domestic Product

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