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Indonesia Growth Seen Near Two-Year Low on Commodities: Economy

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Indonesia Growth Seen Near Two-Year Low on Commodities
Traffic moves along a highway in Pekanbaru, Riau province, Indonesia. A weak expansion in Southeast Asia’s largest economy may make it more difficult for President Susilo Bambang Yudhoyono to reduce fuel subsidies and curb the budget deficit as he tries to allocate more funds to infrastructure. Photographer: Dimas Ardian/Bloomberg

May 2 (Bloomberg) -- Indonesia’s economy probably expanded near the slowest pace in more than two years last quarter as a decline in commodity prices hurt exports, adding to signs of easing global growth.

Gross domestic product probably grew 6.12 percent in the three months through March from a year earlier, after expanding 6.11 percent the previous quarter, according to the median estimate of eight economists surveyed by Bloomberg News. The government will release the figures May 6.

Faltering expansion in Southeast Asia’s largest economy may make it more difficult for President Susilo Bambang Yudhoyono to reduce fuel subsidies, with Standard & Poor’s today lowering its outlook on the country’s rating as it cited a stalling in reforms. The International Monetary Fund last month lowered its forecasts for global growth in 2013, while China and the U.S. expanded less than analysts estimated last quarter.

“We’ve written off a pickup in the developed world and China is struggling as well, and the demand shortfall is impacting Indonesia and other Southeast Asian nations,” said Kevin Lai, an economist at Daiwa Capital Markets Hong Kong Ltd. “Indonesia’s domestic demand is quite resilient but the correction in commodity prices and the external situation means its growth will not be the same as before.”

Asian stocks fell for a second day as weaker growth in Chinese manufacturing and American payrolls added to evidence of a slowdown in the world’s two largest economies. The MSCI Asia Pacific Index dropped 0.4 percent as of 6:09 p.m. in Tokyo.

The Standard & Poor’s GSCI gauge of 24 commodities has retreated 5.5 percent this year. Indonesia is the biggest producer of palm oil, and its commodity exports include coal, rubber, tin and cocoa.

Biggest Loser

The rupiah was the biggest loser against the dollar after the Japanese yen last year among 11 Asian currencies tracked by Bloomberg. It has gained 0.7 percent so far this year.

Hundreds of thousands of demonstrators marched in capital Jakarta yesterday to protest against the planned fuel increases and to demand higher wages, adding pressure on the government ahead of elections in 2014.

S&P revised its outlook on Indonesia’s BB+ rating to stable from positive today. It ranks the country one level below investment grade.

“The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months,” S&P said.

Compensation Program

Yudhoyono said this week he will only increase fuel prices after Parliament approves compensation programs for the poor, a move that could delay efforts to contain a budget deficit that may be more than twice as much as estimated without subsidy cuts. Failure to reduce subsidies last year drained government finances and led to a record current-account shortfall, hurting the rupiah as foreign investors lost confidence.

“The compensation program will have to go through the mid-year budget revision process, which could last until mid- or end-June,” said Helmi Arman, an economist at Citigroup Inc. in Jakarta. “Compared to 2012, negotiations with parliament will likely be on the form of the program and how funds will be distributed. But it’s not smooth sailing yet as hiking in July may cost extra political capital” because of the fasting month of Ramadan, he said.

Without a reduction in fuel subsidies, the deficit may rise to 3.83 percent of gross domestic product from 1.65 percent, Yudhoyono has said.

Export Decline

Indonesia’s overseas shipments fell the most in seven months in March, while imports dropped the most since 2009, the statistics department said yesterday.

Signs of a slowdown are also evident elsewhere in the region. Australia said today building approvals rose less than a third of analysts’ estimates in March from a year earlier, while a China purchasing managers’ index showed slower expansion in manufacturing in April.

Still, central bank policy board members in Japan were optimistic on the outlook for their economy, which they said had stopped weakening and showed signs of picking up, according to minutes of an April 3-4 meeting released in Tokyo today.

The European Central Bank will cut rates to a record low today, according to a majority of projections in a Bloomberg News survey. The U.S. may report a trade deficit of $42.3 billion in March from $43 billion in February, and jobless claims rose in the week through April 27, other surveys showed.

Price Gains

Indonesia’s consumer price gains eased to 5.57 percent last month from a year earlier and the central bank has held borrowing costs for 14 meetings. Policy makers next meet on May 14. While all economists surveyed by Bloomberg News forecast Bank Indonesia will keep rates unchanged this month, some predict it may raise borrowing costs in the coming quarters as fuel price increases spur inflation.

A “rate hike should not be ruled out this year and we continue to expect the possibility of 50 basis points” of increases in the second half, said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore.

The government may cut its 2013 growth target to a range of 6.3 percent to 6.5 percent, from 6.8 percent previously, Deputy Finance Minister Mahendra Siregar said April 24.

“The impact of a fuel price hike on growth will be manageable but monetary tightening and an import slowdown will hit growth more,” said Enrico Tanuwidjaja, a Singapore-based economist at Royal Bank of Scotland Group Plc.

To contact the reporters 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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