Update Indonesian Economy: Economic Growth and Financial Stability
Despite rising concerns about the slowing pace of the Indonesian economy, the deputy minister of Finance Bambang Brodjonegoro reminded investors that Indonesia's economic growth in the third quarter of 2013 still constitutes one of the highest growth rates around the globe. Economic expansion in Q3-2013 slid to 5.6% in Southeast Asia's largest economy. With the exception of China (7.8% GDP growth in Q3-2013), Indonesia's growth continues to outpace growth in other emerging markets, such as Brazil (3.3%) and Turkey (4%).
According to Brodjonegoro, economic growth in the third quarter has slowed in Indonesia due to the sharply depreciating rupiah exchange rate as well as a peak in inflation (brought on by the government's decision to increase prices of fuels by an average of 33 percent in late-June 2013). For Indonesia's central bank (Bank Indonesia), this provided the financial context to raise the benchmark interest rate (BI rate) aggressively since June. In the July-September 2013 period, the Indonesian rupiah fell 17.0 percent against the US dollar, while monthly inflation rose sharply. In July 2013, inflation accelerated 3.29 percent (month-to-month), followed by a 1.12 percent (mtm) rise in August 2013, particularly because the impact of higher fuel prices kicked in. Since September, inflation has shown a moderating trend but remains high at 8.32 percent in October (year-on-year). High inflation curbs people's purchasing power and as household consumption accounts for about 55 percent of Indonesia's annual GDP growth, there is a strong link between inflation and GDP growth. The central bank reacted by raising the BI rate gradually, yet aggressively, since June 2013 from 5.75 percent to 7.50 percent in November 2013 in order to combat inflation, support the rupiah and reduce the country's current account deficit. The latter, which stood at a worrying USD $9.8 billion in the second quarter of 2013 (equivalent to 4.4 percent of the country's GDP), is expected to shrink to USD $8.4 billion in the third quarter.
Another concern for Indonesia is global economic growth, particularly economic growth of the country's largest trading partners. As growth in China and India slows, Indonesia's export figures feel the impact. Weak demand for commodities from these two giant emerging markets have been key in falling commodity prices in recent years. Indonesia, a major commodity producing and exporting country, is highly affected by the volatility in commodity prices on the global market because commodities (mainly raw ones) account for around 60 percent of the country's exports. In the 2000s, Indonesia felt the benefit of this situation when the commodity boom emerged. Now, however, price downswings have hit the country's financial stability. The dependence on raw commodities - as downstream processing industries to deliver value-added products remain undeveloped - makes the country highly vulnerable to commodity price downswings.
The central bank's decision to raise the BI rate by 1.75 percent between June and November 2013 illustrates that the institution stepped on the brake pedal, leading to slowing economic growth, for the benefit of macroeconomic financial stability. However, remembering that Indonesia is a developing country characterized by a large portion of the population living just above the poverty line, slowing economic growth has a large influence on both poverty as well as unemployment numbers. In recent years, both indicators had shown a good downward movement. In 2013, however, both have grown. The latest unemployment data show that the country's open unemployment rate rose from 6.14 percent to 6.25 percent in August 2013 which, in absolute numbers, translates to 7.4 million unemployed people. Poverty rose from 11.7 percent of the total population in late 2012 to 11.97 percent in 2013 (equivalent to 29.1 million people). As such, sacrificing shorter-term higher economic growth for longer-term financial stability is wise in order to avert any larger problems in the future but has its downside (short-term) effects.