Headwinds mount for robust Indonesia economy in Q1

Students burn tyres while protesting against government plans to increase fuel prices, in Makassar, South Sulawesi province April 30, 2013. — Reuters picStudents burn tyres while protesting against government plans to increase fuel prices, in Makassar, South Sulawesi province April 30, 2013. — Reuters picJAKARTA, May 3 — Indonesia’s economy likely grew 6.18 per cent in the first quarter from a year earlier, little changed from late 2012, a Reuters poll showed, but weak global demand, slow domestic reforms and deteriorating government finances threaten to dim the allure of one of the world’s fastest growing markets.

Yesterday, ratings agency Standard & Poor’s downgraded Indonesia’s outlook to stable from positive on concerns over stalling reform momentum. All the more galling for the government, the agency at the same time upgraded once lagging neighbour the Philippines to investment grade.

“In recent months, softer data from the US and China point to weakness in external demand. But Indonesia is likely to be less directly affected. However, certain factors have become less favourable,” said economist at DBS in Singapore, Eugene Leow.

Domestic demand now accounts for around 50 per cent of Southeast Asia’s largest economy and has supported growth despite endemic corruption, weak reform and slowing demand in major export markets.

The poll’s median projection for first-quarter GDP would be slightly weaker than the annual 6.23 per cent recorded in the same period last year but little changed from 6.11 per cent in the fourth quarter.

The forecast is slightly below the central bank’s estimate of 6.2 per cent. It is also lagging the acting finance minister’s projection earlier this week of 6.5 per cent for the full year. Most economists are predicting around 6.2 per cent growth for 2013.

On a quarterly basis, the poll of 11 analysts saw the trillion-dollar economy growing 1.5 per cent.

Leow said that the finance ministry needs to pay more attention to external risks, pointing to the negative impact on domestic consumption, as seen in lower motorbike sales, from an only modest recovery in commodity prices.

The recent soft economic data from the United States, Europe and China has put another dampener on Indonesia’s growth prospects, with exports in March falling 13 per cent on-year and imports declining the most since 2009.

“The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months,” S&P said of its downgrade of Indonesia’s outlook.

The report also expressed concern over the potential of next year’s general and presidential elections to shape policy and eventually threaten growth, though many economists say that Indonesia is finally going through a period of political stability.

The downgrade briefly knocked the recently buoyant main share index which hit a record high over 5,000 on May 1.

A major plus for the economy has been booming foreign direct investment which in January to March grew 27 per cent, after posting a record US$20 billion (RM60 billion) last year.

However, there are worries over the government’s repeated failure to tackle the huge cost of fuel price subsidies which are eating into the budget and diverting resources from areas of the economy which desperately needs improving, such as infrastructure.

The government can’t afford to take foreign investor confidence for granted as the failure to trim subsidies last year dented government finances and saw a record current-account deficit, which in turn drove the rupiah down.

Slowing growth could undercut President Susilo Bambang Yudhoyono’s plans to reduce the government’s bloated subsidy bill, further delaying the reallocation of much needed funds to improve creaking infrastructure.

With an election looming in 2014, the government has to tread a fine line.

On Wednesday thousands of demonstrators marched in  Jakarta to protest against the planned fuel increases and to demand higher wages. The increasingly vociferous labour demands are seen by some analysts as eroding the country’s attractiveness to foreign capital.

The government argues that it needs to be careful not to boost inflation or hurt the poor. April inflation slowed to 5.57 per cent, but remained above Bank Indonesia’s target at 3.5-5.5 per cent this year.

“If the (fuel price) hike comes near Lebaran (the Muslim fasting month in August)...the political risk will mount ... and this could have an impact on the economic fundamentals,” said Jakarta-based economist for Bank Central Asia, David Sumual.

However, the continued high investment levels, relatively strong growth and the slight easing in inflation suggest the central bank will hold its benchmark rate at a record low 5.75 per cent when policy makers meet on May 14. — Bernama



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