Growth in Indonesia’s Manufacturing Sector Revised Down

Contrary to the trend in recent years, growth in Indonesia’s manufacturing sector fell below the national average (GDP slowed to 5.01 percent y/y in Q3-2014) in the third quarter of 2014. However, the Industry Ministry is convinced that this is a temporary phenomenon and that the manufacturing sector will outperform the national average again in the quarters ahead primarily supported by the food, beverage and tobacco segment (which grows strongly due to the large population and rapidly expanding middle class segment) as well as by the continuation of (foreign and domestic) investments in the country’s manufacturing sector. However, in order to make investments more attractive, the government should address various issues such as improving basic infrastructure, securing energy supplies and curtail bureaucracy.

The record low HSBC/Markit PMI in November was caused by the recent subsidized fuel price hike (resulting in higher costs for manufacturers and lower domestic orders), rupiah depreciation (implying more expensive import of raw materials), and weak external demand. Su Sian Lim, Economist at HSBC, expects that Indonesia’s manufacturing sector conditions will remain soft in the months ahead.

The slowdown in manufacturing this year is also caused by the ban on exports of unprocessed minerals introduced in January 2014.

Indonesia’s manufacturing sector has grown strongly in recent years. However, it still relies on industries that have a high percentage of imported raw materials, particularly the automotive and pharmaceutical industries. This provides constant pressures on the current account balance. The food sector, on the other hand, (and which constitutes the main pillar of growth in the non-oil & gas manufacturing industry) is mainly self-sufficient in terms of raw material input.

Growth of the Indonesian Manufacturing Industry 2009-2015:

	2009	2010	2011	2012	2013	2014¹	2015¹
Manufacturing Industry annual % change	2.5%	5.1%	5.8%	6.4%	6.1%	6.0%	6.1%
Economic Growth annual % change	4.6%	6.1%	6.5%	6.2%	5.8%	5.1%	5.5%

^{¹ Government projection
Source: Ministry of Industry}

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