Indonesia Economy Expands 6.3% as Investments Counter Europe

Indonesia’s Economy Expands 6.3% as Investments Counter Europe
Bank Indonesia has paused rate cuts after lowering borrowing costs in February to support Southeast Asia’s largest economy. Photographer: Dimas Ardian/Bloomberg

Indonesia’s economic growth exceeded 6 percent for a sixth quarter as investment gained, countering a slowdown in export growth and reducing the need for further interest-rate cuts.

Gross domestic product increased 6.3 percent in the first quarter from a year earlier, compared with a 6.49 percent pace reported previously for the last three months of 2011, according to a statistics bureau report today. The median of 20 estimates in a Bloomberg News survey was for 6.31 percent growth.

Bank Indonesia has paused rate cuts after lowering borrowing costs in February to support Southeast Asia’s largest economy as Europe’s protracted sovereign-debt crisis threatened demand for Asian exports. Investment in the country increased 32.9 percent in the first quarter and inflation pressure has climbed as costlier oil forces the government to consider ways to reduce its subsidy bill that may push up local fuel prices.

“The solid gains in investment and household spending are positive signs for the economy,” said Fred Gibson, an associate economist at Moody’s Analytics in Sydney. “Rates will remain on hold in the months ahead as the central bank looks to avoid stoking elevated inflation.”

The rupiah rose 0.5 percent to 9,228 a dollar as of 12:18 p.m. in Jakarta today, according to prices from local banks compiled by Bloomberg. The benchmark Jakarta Composite index of stocks fell 1.9 percent.

Investment Push

President Susilo Bambang Yudhoyono plans to spur economic expansion by boosting spending on projects ranging from mass rapid transit systems to power plants and ports to cut poverty and boost incomes. The strategy is similar to that of Philippine President Benigno Aquino, who estimates his country’s economy probably grew at least 5.2 percent in the first quarter, the fastest pace in more than a year.

Indonesia’s GDP expanded 1.4 percent last quarter from the previous three months, compared with the 1.47 percent median estimate of 10 economists surveyed by Bloomberg News.

The year-on-year increase in GDP was the smallest since the third quarter of 2010, according to data compiled by Bloomberg. The slower growth was caused by easing exports, said Suryamin, head of the statistics bureau.

While Indonesia’s export growth has fallen below 10 percent since December, from as much as 49.1 percent in June, the central bank’s cut in its reference rate to a record-low 5.75 percent has helped support domestic demand and boosted profit at lenders such as PT Bank Rakyat Indonesia.

Price Pressures

Indonesia’s foreign and domestic investments increased in the first quarter on an expansion of its mining, food and plantation industries, a report by the nation’s Investment Coordinating Board showed last month. Investment rose to 71.2 trillion rupiah ($7.7 billion) in the three months ended March 31 from a year earlier.

While economic expansion staying above 6 percent reduces the need to cut borrowing costs further, inflation at a seven-month high of 4.5 percent in April is putting pressure on the central bank to contain prices.

Indonesia’s central bank will probably hold its key rate on May 10, according to all but one of the 21 economists surveyed by Bloomberg News.

The country’s parliament rejected a proposal for a 33 percent increase in subsidized-fuel prices from April 1 after public protests against the plan. Lawmakers instead allowed the government to raise prices only if the Indonesia Crude Price exceeds the state budgetary assumption of $105 a barrel by 15 percent over a six-month period. President Yudhoyono’s administration now plans to cap the sale of below-market-rate fuel for certain vehicles.

“Indonesia faces external and internal pressure amid no improvement in Europe, while uncertainty in energy subsidies will reduce consumption,” Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta, said before the report. “Bank Indonesia will hold interest rates unchanged this year to spur domestic consumption as exports still face slowdown risks.”

The economy can grow 6.3 percent to 6.5 percent in the second quarter, central bank Deputy Governor Halim Alamsyah said today. Indonesia’s domestic demand is “still strong,” even as a change in the fuel policy may slow consumption by people with fixed salaries, he said.

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