Indonesia Economic Growth Likely Accelerated, Buoyed by Domestic Spending

Indonesia’s economic growth probably quickened last quarter as domestic spending withstood the impact of a weakening global recovery that led the central bank to cut interest rates for the first time in more than two years.

Gross domestic product climbed 6.6 percent from a year earlier, compared with a 6.49 percent pace in April through June, according to the median of 16 estimates in a Bloomberg News survey ahead of the data on Nov. 7. The economy may have expanded more than 6.6 percent in the third quarter, Bank Indonesia Governor Darmin Nasution said in Jakarta today.

The pickup may be insufficient to dissuade policy makers from lowering rates for a second meeting, as Europe’s worsening debt crisis and faltering U.S. growth threaten exports. Bank Indonesia will cut borrowing costs by a quarter of a percentage point to 6.25 percent on Nov. 10, seven of 16 economists said in another survey, with the rest predicting no change.

“The persisting uncertainty about macroeconomic conditions in advanced economies has only strengthened the desire to pull the trigger again, although Indonesia’s more domestically oriented economy makes it less exposed to global economic spillovers,” said Leif Eskesen, a Singapore-based economist at HSBC Holdings Plc. “It’s a close call” on whether policy makers will cut rates further, he said.

Room to Cut

Bank Indonesia sees room to cut the benchmark rate again this year, Nasution said today. The governor said last month inflation isn’t the country’s primary challenge at a time when global growth is weakening. The central bank has also pledged to buy bonds and intervene to support the rupiah “until the market cools.”

The Indonesian rupiah has dropped about 5 percent against its U.S. counterpart in the past three months, falling along with most other Asian currencies as Europe’s failure to resolve its debt woes leads investors to shun emerging markets.

“Indonesia’s growth is being driven by strong domestic demand and investment, while net exports may have fallen last quarter due to global conditions,” said Helmi Arman, an economist at Citigroup Inc. in Jakarta. “Inflation is slowing, interest-rate differentials with advanced countries remain high and there is uncertainty in the global growth outlook. Bank Indonesia wants to be forward-looking to support domestic growth.”

Asian Slowdown

In Asia, South Korea’s economy expanded at a slower pace in the third quarter compared with the previous three months as companies cut spending. The economies of China and Taiwan grew the least since 2009, while Singapore said last week that its growth will stall over the next few quarters. Australia cut rates this month for the first time since 2009.

The central bank lowered the reference rate by a quarter of a percentage point to 6.5 percent at its October meeting. Since then, a report showing inflation cooled further last month has prompted some economists including Eugene Leow of DBS Group Holdings Ltd. to predict a rate cut at next week’s meeting.

“The outlook for the next six months is still bright as Indonesia continues to enjoy a protracted sweet spot of high growth and low inflation,” said Singapore-based Leow. “Bank Indonesia has been taking a proactive stance. The dovish attitude is unlikely to change given persistent uncertainties on the external front.”

While Indonesia’s economy, Southeast Asia’s largest, is less dependent on exports compared with its neighbors, a global downturn may hurt foreign investment that the government is counting on to boost infrastructure and create jobs.

“Should global sentiment worsen in the next one to two months, we suspect that gross fixed capital formation growth would be hurt” through the first half of 2012, Leow said.

The $707 billion economy is forecast to expand 6.6 percent this year, with growth easing to 6.5 percent in 2012, Nasution said Oct. 11. President Susilo Bambang Yudhoyono aims to expand GDP at an annual average rate of 6.6 percent through the remainder of his term ending in 2014.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam@bloomberg.net

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