Indonesia GDP Grows Less Than 6% as Higher Rates Hurt Expansion

Indonesia’s economy expanded less than 6 percent last quarter as higher interest rates weighed on consumption and exports fell.

Gross domestic product increased 5.62 percent in the three months ended Sept. 30 from a year earlier, the Central Bureau of Statistics said in Jakarta today. That compares with a previously reported 5.81 percent pace for the second quarter and the median estimate of 5.6 percent in a Bloomberg News survey of 23 economists.

The third-quarter data highlights the vulnerability of Southeast Asia’s largest economy as it weathers a depreciated exchange rate, faster inflation and diminished foreign capital inflows ahead of elections in 2014. Bank Indonesia has raised its benchmark rate by 1.5 percentage points since early June to shore up the rupiah and stem price gains, while the government has acknowledged growth next year will be slower as it reins in spending to narrow a record current-account gap.

“Growth is slowing as domestic consumption is hurt by higher prices, rates and rupiah weakness,” Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta, said before the report. “We don’t see investment rising significantly in the short term” as companies may wait for elections to be over before making decisions, she said.

Indonesia will hold parliamentary elections in April and a presidential one in July. President Susilo Bambang Yudhoyono, whose party won the 2009 poll and who can’t run for a third term, is seeing his legacy of economic stability threatened by the sliding rupiah and current-account deficit.

Bank Indonesia cut its 2013 economic growth forecast last month to between 5.5 percent and 5.9 percent, from as much as 6.2 percent earlier.

“The increase in prices -- such as transportation costs as a result of higher subsidized fuel price and the rise in electricity tariffs -- all of these have put a cap on consumer spending,” Henri Honoris, President Director of PT Modern PutraIndonesia, the franchise holder of 7-Eleven convenience stores in the country, said in an Oct. 31 interview.

The World Bank said last month downside risks to Indonesia’s economic outlook are sizeable, as higher borrowing costs and inflation may have a greater-than-expected effect on domestic demand. Inflation remained above 8 percent for a fourth month in October. Exports have dropped for 18 consecutive months.

“External demand continues to provide little boost to growth,” as exporters’ earnings remain under pressure from low commodity prices, Gundy Cahyadi, a Singapore-based economist at DBS Group Holdings Ltd., said before the report.

Foreign direct investment into Indonesia rose 18.4 percent last quarter from a year earlier, after increasing about 19 percent in the April-June period.

“We have to delay our expansion, this year we won’t open new shops as aggressively as the previous years,” Honoris said. “We are adjusting our products and services over the next one or two years as we observe the economic conditions.”

The current-account shortfall was a record 4.4 percent of GDP in the three months through June, and central bank Governor Agus Martowardojo has said it may have narrowed to about 3.3 percent to 3.5 percent of GDP last quarter.

Bank Indonesia and the government are serious about addressing the current-account deficit, Finance Minister Chatib Basri said Oct. 25. “To manage it, our macro policies must be tight” for both monetary and fiscal matters, he said.

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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