Indonesian Economy Expansion Below Forecast

People walk past fashion advertisements at a shopping mall in Jakarta on Nov. 1, 2011. Indonesia posted steady growth of 6.5 percent in the third quarter on buoyant domestic spending and private investment. (Reuters Photo/Beawiharta)

Aditya Suharmoko, Jakarta Globe

Indonesia posted steady growth of 6.5 percent in the third quarter on buoyant domestic spending and private investment, and it showed few signs of slowing despite a weakening global economy.

Annual growth in the third-quarter was slightly lower than a Reuters poll and the central bank’s estimate of 6.6 percent, though in line with the first half’s 6.5 percent, as domestic consumption was strong in the Ramadan festive season in August and exports surged.

Bank Indonesia, the central, bank, forecasts Southeast Asia’s biggest economy to expand 6.6 percent this year and only slow marginally to 6.5 percent in 2012 as global growth weakens.

Still, concern over the global outlook prompted the central bank to cut its benchmark overnight rate by 25 basis points to 6.5 percent in October in a shift away from fighting inflation.

The bank’s governor said last week there was room for further rate cuts to support the G20 economy, since it saw inflation easing to 4 percent by the end of this year. Some analysts expect a second cut at a policy meeting on Thursday.

“A further cut to a record low 6.25 percent is possible, but unnecessary given rapid growth and the potential risks to its inflation target next year,” said George Worthington, economist at IFR Markets in Sydney.

Robust Consumption

Consumption, which fuels nearly 60 percent of the economy, remained robust in the third quarter as shown by strong car sales and loan growth.

Main vehicle seller PT Astra International Tbk booked a 24 percent rise in third-quarter net profit.

Indonesia’s capital Jakarta has seen worsening traffic congestion in recent years, as growing wealth and low interest charges lead an emerging middle class to buy more cars and motorbikes, even though vehicles often get stuck for hours.
Unlike Asian export-driven nations such as Taiwan and South Korea, Indonesia has yet to see signs of a slowdown as exports grew strongly at 46.3 percent in September.

The country is the largest exporter of thermal coal, palm oil and tin.

“The performance of domestic and private consumption has stayed intact while third quarter exports have not shown an impact from the crisis,” said David Sumual, economist at Bank Central Asia in Jakarta.

Manufacturing saw output up 6.6 percent between July and September this year, faster than the previous quarter, on expansion in the auto and chemical industries, data from Indonesia’s statistics bureau shows.

In the third quarter, agricultural growth slowed, to 2.7 percent year-on-year from 3.9 percent in the second quarter. But foreign direct investment rose 16 percent in the third quarter from a year ago, as the growing consumer market and abundant resources attracts firms.

During September, Unilever UNc.AS said it plans to invest $750 million in factories to make personal care goods and ice cream, while Toyota said it will invest $337 million to build a new factory.

Indonesian economy was little hurt by the 2008 global financial crisis, and analysts say Indonesian authorities are more prepared to face a global crisis than they were in 2008.

Bank Indonesia has made a series of moves to protect the economy this year, from cutting back on issuance of its short-term SBI debt to requiring exporters to return funds parked overseas.

On November 4, its governor said he planned to tighten regulation on how banks issue and charge for credit cards.

“What I’m keen to see is how banks handle non-performing loans while pushing for higher loan growth to help the economy expand… there is a risk that they could face bigger non-performing loans if economic growth declines,” said Christopher Kelvin, banking analyst at Danareksa Securities in Jakarta.