Indonesia’s GDP grows 4.67 pct in Q2, slowest in six years

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Published: August 6, 2015 8:45:31 AM

Indonesia's economic growth in the second quarter dropped to its slowest since 2009, with prices for commodity and energy exports remaining weak and President Joko Widodo unable to push badly needed infrastructure projects past bureaucratic snarls.

Indonesia’s economic growth in the second quarter dropped to its slowest since 2009, with prices for commodity and energy exports remaining weak and President Joko Widodo unable to push badly needed infrastructure projects past bureaucratic snarls.

Southeast Asia’s largest economy expanded 4.67 percent in April-June compared with the same period a year ago, better than a Reuters poll forecast of 4.61 percent, but still below the revised estimate of 4.72 percent growth for the January-March quarter.

The economy was likely to achieve 5.0 to 5.2 percent growth this year, said Finance Minister Bambang Brodjonegoro, making a slight downgrade to the government’s expectation of 5.2 percent.

A Reuters poll of analysts found they expected growth of 4.9 percent this year.

“The recipe for H2 growth is to maintain household consumption growth to at least 5 percent,” Brodjonegoro told reporters.

“The second recipe is to speed up government spending.”

Falling commodity prices and the government’s strict regulation on shipments of ore weighed on the mining sector, Suryamin, the head of the bureau said, resulting in the sector contracting 5.87 percent in the June quarter.

Consumption, investment and imports were all weaker.

Meanwhile, the government’s contribution to GDP failed to show much improvement compared to the first quarter. The government said it spent only 46 percent of its budget through July, with capital expenditure particularly weak.

‘CHALLENGES’

In order to speed up spending, the administration will instruct firms with major infrastructure projects to work every day, including weekends. Among those which have been slow to get off the ground is a government programme to build 1 million homes. Only 400,000 have been built.

“We expect growth in the second half to pick up on the back of investment, although we don’t think government infrastructure spending will be as big as we initially expected,” said Leo Putra Rinaldy, an economist at Mandiri Sekuritas in Jakarta.

“The government is facing challenges in revenue collection, which mean there could be spending cuts to control the deficit. Those spending cuts could come from infrastructure spending.”

Widodo’s nine-month-old administration has failed to deliver significant economic reforms, and the central bank is poorly placed to boost the economy, with inflation rising and the rupiah vulnerable to outflows once U.S. rates rise.

“We hope this has hit bottom. The floor is 4.7 percent,” the president said.

On Tuesday, Bank Indonesia Governor Agus Martowardojo said authorities were closely watching the risk of a further slowdown, while noting the uncertainties posed by an anticipated rise in U.S. interest rates.

The administration hopes that a series of fiscal policies would be more effective in the second half, including tax incentives to attract investment, and an increase in the threshold of income tax to drive up purchasing power.

But analysts remained sceptical.

“The rupiah has continued to decline … and as long as the rupiah keeps falling, inflation won’t come down and interest rates can’t be lowered,” said Satoshi Okagawa, Singapore-based global markets analyst at Sumitomo Mitsui Banking Corp.

“In addition, oil prices have been hitting another bottom, and coal prices have fallen further, so exports won’t grow …  There aren’t any catalysts to give the economy a lift.”

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