Analysis: What Caused Indonesia's Slowing Economic Growth in 2013

The year 2013 also represents the third consecutive year of slowing economic growth in Indonesia. From a 6.5 percentage growth in 2011, the country's GDP growth slowed to 6.2 percent in 2012 and now (probably) to 5.7 percent in 2013. Although it is still a strong growth figure compared to its regional peers or fellow G20 group members (as domestic consumption remains strong, accounting for about 55 percent of Indonesia's economic growth, and direct investments hit a record high at IDR 398.6 trillion), it is somewhat disappointing and far from the initial government targets that were set in the National Long-Term Development Plan (RPJPN).

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	-	5.7¹
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

^{¹ forecast
Source: Statistics Indonesia (BPS)}

However, it should not be forgotten that Indonesia's government and central bank (Bank Indonesia) deliberately stepped on the brake of economic growth in order to safeguard financial stability as inflation accelerated to almost nine percent after the government cut fuel subsidies in late June 2013, while the rupiah exchange rate rapidly depreciated due to capital outflows after Federal Reserve Chairman Ben Bernanke started to speculate about an end of the bond-buying program (quantitative easing) in late May 2013. This speculation triggered massive capital outflows from Indonesia's capital markets as international investors started to anticipate the tapering. Thus, between June and November 2013, Bank Indonesia raised its benchmark interest rate (BI rate) from 5.75 percent to 7.50 percent. This managed to curb high inflation but came at the expense of economic growth.

Why was Indonesia more severely hit by capital outflows than most other emerging markets? The answer to this question is not only because more money had flown into Indonesia since the start of QE3 than in other emerging economies and therefore it is logical that more money will fly out again when global sentiments change. But it is also due to the country's financial make-up, particularly the current account deficit. Market participants were concerned about Indonesia's reliance on external money to finance its deficit as the value of the country's exports - mainly raw commodities - plunged amid falling global commodity prices, while imports accelerated amid large demand stemming from the country's rapidly expanding middle class. In the second quarter of 2013 this led to the record high current account deficit of USD $9.9 billion (or 4.4 percent of GDP). Due to slightly improved global demand as well as government fiscal policy changes, the deficit eased to USD $8.4 billion (3.8 percent of GDP) in the third quarter of 2013 and may have fallen to 3.5 percent of GDP by the end of the fourth quarter. However, this is still an unsustainable level. Generally, a deficit below three percent is considered sustainable.

The depreciating rupiah exchange rate, which fell over 21 percent against the US dollar during 2013, as well as the higher interest rate policy of Indonesia's central bank did, however, manage to curb domestic demand, thus improving the trade balance. In the last three months of 2013, the monthly trade balance turned into a surplus, although considering the full year, Indonesia still posts a large trade deficit.

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