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akarta'€™s capital market cheered last week as Indonesia'€™s gross domestic product (GDP) grew 5 percent in the fourth quarter of 2015, the strongest growth rate recorded compared with previous quarters, and higher than the growth rate predicted by many analysts. There was the widespread feeling that the country'€™s economic growth, which had been weakening since 2011, might start climbing up again due to President Joko '€Jokowi'€ Widodo'€™s economic policies.

The Jakarta Composite Index (JCI) was up by 2.9 percent. Shares of Bank Mandiri and Bank Rakyat Indonesia (BRI), two of Indonesia'€™s biggest banks, soared by 7 percent. The JCI has gained 4 percent in 2016 as of Feb. 11, the best performing index in the world, according to Bloomberg data. On Feb. 11, when most stocks in Asia and Europe plunged between 6 and 7 percent, the JCI was up by 0.9 percent.

However, for the whole year of 2015, the economy only grew by 4.8 percent, lower than the 5.1 percent recorded in 2014. On the supply side, all main sectors of the economy '€” agriculture, manufacturing, mining, wholesale and retail '€” registered weaker growth in 2015 than in 2014.

The prolonged drought caused by the presence of El Niño left its mark on agricultural production. In 2015, growth in agriculture fell sharply from 6.6 percent in the second quarter to 3.1 percent in the third quarter and to only 1.6 percent in the fourth quarter. For a sector that absorbs 35 percent of the labor force, reduced growth in agriculture presents serious implications for employment. This lacklustre growth also explained why rice stocks dwindled, rice prices surged and poverty increased.

Growth in mining and quarrying contracted sharply in 2015, from growth of 0.7 percent in 2014 to negative 5.1 percent. Chaotic government policies in mining amid slumping commodity prices were not helpful. The prices of copper and nickel, two of Indonesia'€™s main base metal exports, were 40 percent of their prices in September 2011. But prices were not the only reason for the steep fall in mining growth. The government'€™s self-inflicted wound related to its policy of banning raw mineral exports was partly responsible for the contraction in the mining sector.

Manufacturing, the biggest component of the GDP, also suffered a slowdown in its growth. It grew 4.3 percent in 2015, down from 4.6 percent in 2014. Over the same period, wholesale and retail sector growth fell significantly from 5.2 percent to just 2.5 percent. This should be of concern because this is a sector that has become one of the country'€™s biggest sources of employment.

On the demand side, while brighter pictures emerged from the growth of government expenditure and investment, consumption and export growth remained a drag on GDP growth.

Government efforts to speed up budget disbursement, especially for infrastructure, in 2015 have shown results. Growth in government expenditure was 5.4 percent, more than twice the growth rate in 2014.

Investment growth rebounded strongly to 5.1 percent in 2015 from 4.3 percent in 2014, although it was still well below the growth figures recorded in 2011 and 2012. There was an acceleration in investment growth from quarter to quarter and it reached its peak in the last quarter of 2015. These trends might have to do with the economic packages introduced by the government to eliminate bureaucratic hurdles for investment and boost fiscal incentives.
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BI had to deal with mounting capital outflows and the erosion of its reserves.

But these high rates of growth in government expenditure and investment were not adequate to compensate for the steep slowdown in the growth of consumption that constitutes 56 percent of the GDP. Consumption growth fell from 5.5 percent in 2014 to 4.96 percent in 2015. It was the lowest growth rate recorded since 2012.

All these indicate that the problem with Indonesian GDP in 2015 was largely the weak growth in consumption reflecting weak demand in the economy. The steep fall in inflation from 8.4 percent in 2014 to 3.3 percent in 2015 should bolster consumption through increasing purchasing power. The fact that this did not happen indicated that there was still another factor holding up growth in demand.

Budget constraint has prevented the government from providing meaningful fiscal stimulus. Most gains in government revenue from eliminating fuel subsidies have been redirected into infrastructure development and social programs.

Bank Indonesian (BI) had to concentrate on stabilizing a rupiah suffering from depreciation as Indonesia faced external economic threats in 2015 such as the market volatilities created by uncertainty surrounding the US Federal Reserve interest rate increase, low commodity prices and a growth slowdown in China.

Furthermore, BI had to deal with mounting capital outflows and the erosion of its reserves. Under these circumstances, it was difficult for BI to ease its monetary stance.

Macro stability was prioritized at the expense of pro-growth monetary policies.

Recently, however, several new developments have arisen. Entering 2016, inflation remains low, the rupiah has strengthened and has been stabilized and capital has been flowing back.

These developments should divert BI'€™s focus from macro stability to growth-stimulating objectives. BI cut its benchmark rate by 25 basis points last month. There is more room now for BI to continue cutting its official rate to boost demand. However, BI could wait for a while before doing so, as there was another shock in world financial markets last week.

A sudden plunge in oil prices to US$26.68, the lowest level since 2003, and Federal Reserve chair Janet Yellen'€™s remark at a Congressional hearing that a plan to raise the interest rate this year was not off the table, sent the world markets into turmoil once more.

As external volatilities and uncertainties return, Indonesia'€™s macroeconomic stability is at risk, forcing BI to maintain its current monetary stance. This means business might have to wait for a while before another BI interest rate cut.
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The writer is a commissioner at a publicly listed oil and gas services company. The views expressed are his own.