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Indonesian Leader Defends Economic Record as Term Winds Down

Aug. 17 (Bloomberg) -- Indonesian President Susilo Bambang Yudhoyono offered a favorable assessment of his record even as growth slowed before the 2014 elections, saying the government has expanded the middle class and kept the budget deficit low.

The budget shortfall has stayed under 3 percent of gross domestic product, unemployment and poverty rates have fallen, and the country has achieved an investment-grade rating, Yudhoyono said in an annual speech in Jakarta yesterday ahead of the nation’s independence day. The government sees economic growth of 6.4 percent next year, he said yesterday in a separate budget speech, a level at the bottom end of a target range set last month.

Yudhoyono, due to hand over power in elections next year, is seeking to shore up his legacy of political and economic stability in the world’s fourth-most populous nation. As he nears the end of a decade in power, the leader faces an economy that is growing at the slowest pace since 2010, a slumping rupiah and the fastest inflation in more than four years.

“Volatility in the global economy and commodity prices remind us of the need to diversify our sources of economic growth,” Yudhoyono said in the budget speech. “Indonesia can’t rely on natural resources and unskilled labor any more.”

Yudhoyono said he expects the country’s per capita GDP to approach $5,000 by the end of 2014, up from $3,592 in 2012. The country has maintained growth above 4 percent during his tenure, as spending by the growing middle class shielded Southeast Asia’s largest economy from the 2008-2009 financial crisis.

Middle Class

“People’s purchasing power continues to increase, the middle class is growing significantly, fiscal and monetary stability are maintained,” Yudhoyono said in his first speech. He said the country had withstood external shocks such as a global oil-price spike and the financial crisis.

The government expects a slight improvement in the global economy next year, he said. The 2014 budget assumes a deficit of 1.49 percent of gross domestic product, even as capital spending is set to rise 6.9 percent from this year, including on higher wages, the election and food security, Yudhoyono said.

Gross domestic product increased 5.81 percent from a year earlier in the three months ended June 30, the first time the economy grew less than 6 percent since 2010.

“A 6.4 percent target for GDP is too optimistic, given the global economy is slowing down, investment and exports are in a slowing trend,” said David Sumual, chief economist at PT Bank Central Asia in Jakarta. Sumual said he expects GDP to grow about 6 percent next year.

Stock Losses

PT Bank Rakyat Indonesia led banking-stock losses, falling 6 percent yesterday, while auto seller PT Astra International dropped 3.1 percent, as investors worry about slowing lending and consumption. Foreign funds pulled $195.5 million from Jakarta equities this year as of yesterday, data compiled by Bloomberg shows.

The rupiah touched a four-year low yesterday. A report earlier this week showed foreign reserves fell for a third month to $92.7 billion in July, the lowest level since October 2010. That compared to $35.4 billion when Yudhoyono assumed the presidency in 2004, according to data compiled by Bloomberg.

The current-account deficit widened to $9.85 billion in the three months through June, data from Bank Indonesia showed yesterday. That was the biggest shortfall since at least 1989, figures compiled by Bloomberg show.

Political Ceiling

While Yudhoyono was re-elected with more than 60 percent of the vote in 2009, he hasn’t been able to overcome parliamentary opposition to economic reforms, Wellian Wiranto, a Singapore-based investment strategist at the wealth management unit of Barclays Plc, said in an e-mail on Aug. 15.

“Political limitation has put a ceiling on how much the Indonesian economy can achieve when times were good -- and may well affect how readily the government can now put a floor on a growth slowdown during this tricky period,” Wiranto said.

Yudhoyono said yesterday that food-price volatility remains a challenge and the country plans to add 40,000 hectares of new rice fields as it targets a 10 million ton surplus of the staple grain next year. Higher food prices and the government’s move to lift subsidized fuel prices in June drove the inflation rate to a higher-than-expected 8.61 percent in July, the highest since 2009, data showed on Aug. 1.

Higher inflation expectations led the central bank to be the first in Asia to raise interest rates this year, with a total increase of 75 basis points in June and July. It left the rate on hold on Aug. 15.

Gas Prices

The move to raise pump prices was aimed at capping an annual fuel-subsidy bill of more than $20 billion that is sapping funds needed for roads and bridges. Next year’s budget allocates 336.2 trillion rupiah ($32 billion) for total subsidies, little changed from 346.4 trillion rupiah spent last year. In his 2012 independence day speech, Yudhoyono promised to lift government capital spending by 15 percent this year to boost infrastructure.

“So far, the government spending’s disbursement is always too late and capital spending will only increase 7 percent next year, which is a very small rise,” Sumual said. “Indonesia can’t have hopes from government spending.”

To contact the reporters on this story: Neil Chatterjee in Jakarta at nchatterjee1@bloomberg.net; Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net

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