Indonesia Growth Falls Below 6% as Risks to Economy Increase

Indonesia’s economy grew less than 6 percent last quarter for the first time since 2010, adding to risks for the Southeast Asian nation as investments ease, inflation accelerates and the currency slumps.

Gross domestic product increased 5.81 percent in the three months ended June 30 from a year earlier, the Central Bureau of Statistics said in Jakarta today. That compares with a revised 6.03 percent pace for the first quarter and the median estimate of 5.9 percent in a Bloomberg News survey of 19 economists.

Indonesia is contending with easing growth at a time when higher fuel costs spurred the fastest inflation in more than four years and the rupiah trades near the weakest level since 2009. The central bank raised interest rates at the past two meetings in an effort to temper prices and reduce capital outflows, actions that may hurt domestic spending and compound the slowdown in Southeast Asia’s largest economy.

“I expect the weakness to reflect a further downturn in investment, which is likely to spread to a downturn in consumer spending in time, given the subsidized fuel price hike and interest-rate rises,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “While most expect GDP growth to pick up during 2014, we expect it to slow to an average of 5.3 percent.”

The rupiah was little changed at 10,285 per dollar as of 5.10 p.m. in Jakarta today, according to prices from local banks compiled by Bloomberg. It has dropped more than 6 percent this year, and led emerging-market currency declines in July, data compiled by Bloomberg showed.

Best Week

Ten-year bonds headed for the best week in a more than a year. The yield on the notes due in 2023 fell 34 basis points, or 0.34 percentage point, from a week ago to 7.62 percent as of 11:35 a.m. in Jakarta, the biggest drop since January 2012, data from the Inter Dealer Market Association show.

Indonesia’s GDP increased 2.61 percent last quarter from the previous three months, when it expanded a revised 1.42 percent. That compared with the 2.75 percent median estimate in a Bloomberg survey. The Statistics Department didn’t say if there are revisions to growth beyond the first quarter. The economy grew 5.92 percent in the first half, it said.

Indonesia must take proper measures so that growth will not be far off the government’s target, President Susilo Bambang Yudhoyono said in Jakarta after the data, without giving details. Finance Minister Chatib Basri said it would be difficult to meet a 2013 target of 6.3 percent, and the government needs to speed up its spending in an effort to keep expansion at above 6 percent.

Tightening Stance

Government spending increased 2.13 percent last quarter from a year earlier, after rising 0.42 percent in the first three months of 2013, the statistics office said. Household consumption grew 5.06 percent last quarter, after climbing 5.17 percent in the first quarter. Investment growth eased to 4.67 percent, from 5.78 percent.

Bank Indonesia raised its benchmark rate by a combined 75 basis points in June and July to bolster the weakening currency and ease inflation pressures after the government increased fuel prices. Consumer prices rose 8.61 percent in July from a year earlier, after a 5.9 percent gain in June, the Statistics Bureau said yesterday.

Bank Indonesia is surprised to see the inflation rate so high, and price-gains this year may be above 8 percent, exceeding the government’s estimate, central bank Governor Agus Martowardojo said today. The monetary authority will respond with a policy mix, Martowardojo said, without giving details.

Economic Stability

“In order to restrain price pressures and to ease external funding concerns, the monetary-tightening stance is likely to be maintained over the coming months as Bank Indonesia prioritizes economic stability over economic growth,” said Eugene Leow, an economist at DBS Group Holdings Ltd. in Singapore. “The pace of GDP growth in the second half is likely to be muted by Indonesia’s standards, averaging 6 percent year-on-year.”

The central bank sees expansion this year at the lower end of its forecast range of 5.8 percent to 6.2 percent, from a previous estimate of as much as 6.6 percent, Deputy Governor Perry Warjiyo told reporters today. Monetary policy will focus on stabilizing inflation and the currency, and keeping the current-account deficit at manageable levels, he said.

World Bank

When the central bank is confident these targets are achievable, it will move toward supporting growth, Warjiyo said.

The World Bank cut its forecast for Indonesian growth in 2013 to 5.9 percent from a previous estimate of 6.2 percent as expansion in China slows. China’s gross domestic product rose 7.5 percent in April-to-June from a year earlier, down from 7.7 percent in the first quarter, extending the longest streak of sub-8 percent expansion in at least two decades.

Foreign direct investment into Indonesia rose 18.9 percent last quarter from a year earlier, the smallest gain since 2010, government data showed last month. Domestic investment surged 59.1 percent in the same period.

Overseas shipments fell 4.5 percent in June, while imports dropped 6.8 percent, the statistics department said yesterday. The country is the biggest producer of palm oil, and its commodity exports include rubber, tin and cocoa.

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