Economic Growth of Indonesia Slows to 5.01% y/y in Third Quarter 2014

Externally, economic expansion of Indonesia has been limited by the sluggish global economy. With China’s economy growing at a relatively low pace, global demand for Indonesian commodities has declined sharply (for example crude palm oil, coal and rubber). Being a global force in terms of commodity exports - and the fact that commodities account for around 60 percent of the country’s total exports - implies that Indonesia is more susceptible to the effects of volatility in commodity prices on the global commodity market. In the 2000s Indonesia felt the positive effects of this situation (during the 2000s commodities boom). However, since the crisis in the late 2000s, global commodity prices have showed a downward trend and which has seriously burdened Indonesia’s export performance. In the third quarter of 2014, exports declined by 0.7 percent y/y. Furthermore, the slowdown in exports is also partly caused by the controversial ban on mineral ore exports which was implemented by the Indonesian government in January 2014 (although the government has somewhat relaxed its stance on the ban and therefore some mineral ore shipments have been resumed after renegotiations between miners and the government).

Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV
2014	5.22	5.12	5.01
2013	6.03	5.89	5.62	5.78
2012	6.29	6.36	6.16	6.11
2011	6.45	6.52	6.49	6.50
2010	5.99	6.29	5.81	6.81
2009	4.60	4.37	4.31	4.58

^{Source: Statistics Indonesia (BPS)}

Gross Domestic Product of Indonesia 2006-2013:

	2006	2007	2008	2009	2010	2011	2012	2013
GDP (in billion USD)	285.9	364.6	432.1	510.2	539.4	706.6	846.8	878.0
GDP (annual percent change)	5.5	6.3	6.1	4.6	6.1	6.5	6.2	5.8
GDP per Capita (in USD)	1,643	1,923	2,244	2,345	2,984	3,467	3,546	3,468

^{Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)}

Problematic for the Joko Widodo-led government is that current forecasts for commodity prices do not indicate a marked improvement in the foreseeable future. Widodo (possibly better known by his nickname Jokowi) repeatedly pledged to raise the country’s economic growth to +7 percent (y/y) by the end of this (first) term, a growth pace that was last seen during Suharto’s authoritarian New Order regime (1966-1998). This means that in order to achieve his GDP growth target, Jokowi cannot rely much on commodity exports. Instead, growth should originate from investments (both government as well as foreign and domestic direct investments) and private consumption. Private consumption traditionally is a key pillar of Indonesia’s economic growth, accounting for 55.11 percent of GDP in the third quarter of 2014 (slightly down from 55.72 percent of GDP in the previous quarter). Private consumption is not expected to improve soon as the central bank of Indonesia has introduced a higher interest rate environment in 2013 (the key BI rate is currently 7.50 percent) in an effort to combat high inflation (triggered by higher subsidized fuel prices in June 2013), curb the wide current account deficit, support the rupiah exchange rate (which had depreciated over 25 percent against the US dollar during the second half of 2013), and limit capital outflows (which occurred in 2013 amid the looming end of the US Federal Reserve’s quantitative easing program). This higher interest rate environment limits economic growth as it reduces consumer spending and investment.

Bank Indonesia is not expected to lower its BI rate anytime soon. On the contrary, it is expected to raise the rate by perhaps 0.50 percent to 8.00 percent as Jokowi will raise subsidized fuel prices this month (by perhaps IDR 3,000 per liter, almost a 50 percent price hike). Meanwhile, US interest rates will most likely raise in the second quarter of 2015 triggering another round of capital outflows from emerging markets, including Indonesia. The wide current account deficit (which hit USD $9.1 billion, or 4.27 percent of GDP in the second quarter of 2014) makes Indonesia particularly vulnerable to capital outflows, and therefore it is important for the current government to limit this deficit before US interest rates increase. The structural problem of the current account deficit lies in the oil & gas balance. Higher subsidized fuel prices is thus a good strategy to curb expensive oil imports (despite global oil prices having fallen sharply recently). However, it will also lead to (temporarily) high inflation and declining purchasing power of Indonesian consumers. Well prepared social safety programs are required to avoid an increasing poverty rate.

Fixed investment in Indonesia only expanded 4.02 percent y/y in the third quarter of 2014, the slowest pace since 2009. With the World Bank recently having released a report which ranks Indonesia on 114^th position in terms of the ease of doing business, there is much room for improvement in this area and thus room to boost GDP growth. Jokowi announced to streamline the government’s permitting process by combining ministry licenses in a one-stop service. Although foreign direct investment is still strong, the pace has slowed to 16.9 percent y/y in the third quarter of 2014 according to data from the Investment Coordinating Board (BKPM). Total investment expanded 19.3 percent.

View Indonesia’s Q3-2014 GDP Growth Statistics

Key Findings:

• Indonesia’s economic growth continued to slow (to 5.01 percent y/y) in the third quarter of 2014, the slowest quarterly growth pace in five years

• The declining growth pace is caused by weakening exports (amid sluggish global demand for commodities causing falling commodity prices) and slowing domestic consumption amid a higher interest rate environment

• President Widodo targets GDP growth of +7 percent y/y during his (first) term. However, this will require structural reforms

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Fixed investment in Indonesia only expanded 4.02 percent y/y in the third quarter of 2014, the slowest pace since 2009. With the World Bank recently having released a report which ranks Indonesia on 114^th position in terms of the ease of doing business, there is much room for improvement in this area and thus room to boost GDP growth. Jokowi announced to streamline the government’s permitting process by combining ministry licenses in a one-stop service. Although foreign direct investment is still strong, the pace has slowed to 16.9 percent y/y in the third quarter of 2014 according to data from the Investment Coordinating Board (BKPM). Total investment expanded 19.3 percent