Headlines

New equilibrium as GDP
slows to 5.6%

Economic growth: Men work at a construction site on Jl. Pramuka in East Jakarta on Wednesday. The Central Statistics Agency (BPS) announced the domestic economy grew 5.62 percent in the third quarter of 2013, the slowest since 2009. (JP/Wendra Ajistyatama)
Economic growth: Men work at a construction site on Jl. Pramuka in East Jakarta on Wednesday. The Central Statistics Agency (BPS) announced the domestic economy grew 5.62 percent in the third quarter of 2013, the slowest since 2009. (JP/Wendra Ajistyatama)

The country posted its slowest gross domestic product (GDP) growth in nearly four years due to moderation in investment trends as the central bank’s aggressive monetary tightening began to take effect.

The domestic economy expanded by 5.62 percent in the third quarter, the slowest pace since 2009, the Central Statistics Agency (BPS) reported on Wednesday, with the economy having already decelerated for a fifth consecutive quarter.

Among the components of growth, investments saw the steepest downturn, while household consumption surprisingly stood strong despite high inflation from the fuel-price hike that took place during the period.

Gross fixed capital formation — an indicator of investments — only grew by 4.5 percent in the third quarter, compared to 10 percent in the same quarter last year, as investors held back from expanding their businesses due to higher borrowing costs set by Bank Indonesia (BI).

Meanwhile, household consumption grew by 5.5 percent in the third quarter, decreasing modestly compared to 5.7 percent in the same quarter last year.

“We are relieved that the economic slowdown was not as bad as what we initially feared,” Deputy Finance Minister Bambang Brodjonegoro had said on Friday, noting a forecast from the International Monetary Fund (IMF) that predicted Indonesia’s economy to grow by only 5.3 percent throughout 2013.

The deputy minister was upbeat that economic growth in the fourth quarter would rebound, supported by stronger government spending in the fourth quarter. He predicted Indonesia’s full-year GDP growth to reach 5.8 percent.

Government officials have repeatedly highlighted the importance for the country to slow its growth and focus on economic stability, rather than to pursue robust economic expansion.

This is because Indonesia’s 10 consecutive quarters of 6-plus percent economic growth was widely feared as unsustainable, as reflected by the country’s high imports that widened the current account deficit and exerted heavy pressure on the rupiah.

“With lower growth, there would be a decline in imports, eventually leading to a ‘rebalancing’ in the current account and our economy as a whole,” Investment Coordinating Board (BKPM) chairman Mahendra Siregar said on Wednesday.

“Foreign investors would see our present growth rate as still high and attractive, given the fact that it is still higher compared to the average of other economies.”

The fact that Indonesia saw only a modest slowdown to 5.62 percent in the third quarter from 5.81 percent a quarter earlier — despite the fuel-price hike and BI’s aggressive monetary tightening that took place in the period — was actually a reflection of the country’s impressive economic stability, analysts say.

“It is important to not be overly concerned” on the recent slowdown in Indonesia’s economy, said Gareth Leather and Krystal Tan, economists from London-based research company Capital Economics Ltd.

“After all, in contrast to India — where the pace of growth has nearly halved in the past couple of years — the slowdown in Indonesia has so far been gradual,” they wrote in a note.

However, persistently strong household consumption has also raised speculation on whether the central bank has done enough in terms of policy tightening, according to Su Sian Lim, a Singapore-based economist with HSBC Bank.

“The central bank needs to closely monitor if the rate hikes it has delivered since June are dampening household activity as desired,” she wrote in an email. “If the current-account deficit is too narrow in a steady and sustained manner, private consumption needs to slow,” she continued.

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