Five Takeaways From Indonesia GDP for Incoming President Widodo

Indonesian President-elect Joko Widodo is set to take over an economy expanding at the weakest pace since 2009, as a contraction in mining, exports and government spending threatens his goal of 7 percent growth.

Gross domestic product rose 5.12 percent in the three months ended June 30 from a year earlier. What are the implications for Widodo? Here are five takeaways:

1) Monetary policy will probably remain tight as consumption growth held at about 5.6 percent last quarter.

“Overall growth surprised on the downside, but without a significant slowdown in consumption that would make Bank Indonesia more comfortable -– and start looking at potential rate cuts,” Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp., said in a report yesterday.

Bank Indonesia will probably hold its benchmark interest rate at 7.5 percent next week, according to all five economists surveyed by Bloomberg News.

2) Protectionism may restrain exports further, hurting the economy.

Mining contracted in the second quarter after Indonesia in January banned the export of mineral ores, leading to mine closures, job losses and a global surge in nickel prices.

Widodo, known as Jokowi, has said he wants to renegotiate contracts with foreign companies, keep more resources for domestic use and restrict overseas investment in banks.

3) Jokowi may have to cut subsidies earlier than planned to free up funds for government spending after GDP data showed public-sector consumption fell.

Subsidies that keep local fuel prices low have spurred energy imports, straining the trade balance and tying up funds that could be used to build roads, bridges and railways. The government in June said it will cut 2014 spending among ministries by 43 trillion rupiah ($3.7 billion) as subsidies force cut backs elsewhere.

The government needs to adjust fuel subsidies because they burden the budget and aren’t well targeted, Coordinating Minister for the Economy Chairul Tanjung told reporters yesterday.

4) Rupiah will probably remain under pressure as a U.S. recovery spurs the Fed to reduce monetary stimulus, making emerging economies with trade deficits and slowing growth, like Indonesia, vulnerable to outflows of funds.

The rupiah is the worst performer in Asia in the past three months among 11 currencies tracked by Bloomberg. It may weaken toward 12,000 per dollar by the end of the year, Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore, said in a report yesterday, citing the expected impact of U.S. monetary policy, even with an anticipated improvement in Indonesia’s trade balance.

5) Jokowi needs to boost investment to bolster GDP as exports seen to remain weak.

Investment rose 4.53 percent last quarter from a year earlier, easing from a 5.14 percent pace in the previous three months. Exports fell 1.04 percent from a year earlier.

“For the rest of this year, we can only rely on investment and household consumption as exports remain weak,” Sri Soelistyowati, a director at the Indonesia statistics office, told reporters yesterday.

Jokowi, the governor of Indonesia’s capital city who ran on a platform of concern for common people, won last month’s election, giving him a mandate to govern from October until 2019. The result is yet to be endorsed by the Supreme Court after rival Prabowo Subianto, a former army general, contested the outcome with the Constitutional Court, which is expected to rule by late August.

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