Indonesian Economic Growth Slows in Challenge to Widodo

Indonesia’s economic growth eased to the slowest since 2009 as exports and government spending fell, underscoring the challenge to President-elect Joko Widodo as he prepares to lead the world’s fourth-most populous nation.

Gross domestic product rose 5.12 percent in the three months ended June 30 from a year earlier, the statistics bureau said in Jakarta today. The increase was less than the median 5.20 percent estimate in a Bloomberg survey of 20 economists, and a revised 5.22 percent pace in the first quarter.

Widodo, known as Jokowi, aims to boost the growth rate in Southeast Asia’s largest economy to 7 percent in two years by improving infrastructure and manufacturing. Indonesia hasn’t seen such a pace since the years before the 1997-98 Asian financial crisis, and a ban on mineral-ore shipments has hurt exports in recent months while energy imports spurred recurrent trade deficits.

“The new government will have their plates full,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch. “The new president will have to revive a slowing economy, contain the current-account deficit, and reduce the fiscal pressures from ballooning fuel subsidies.”

The rupiah rose 0.4 percent to 11,713 per dollar as of 1:56 p.m. in Jakarta, prices compiled by Bloomberg from local banks show. It was the biggest gainer among 24 emerging-market currencies last month.

Export Drag

“Obviously export numbers have been coming in below expectations and that was the key drag,” said Gundy Cahyadi, Singapore-based economist at DBS Group Holdings Ltd. “The rupiah is typically not so sensitive to GDP numbers, and it doesn’t look like there’s going to be any sharp movement in the market.”

Indonesia’s GDP rose 2.47 percent last quarter from the previous three months. That compares with a median estimate for 2.65 percent growth in a Bloomberg survey, and a revised 0.97 percent pace in the first quarter.

Exports slid 1.04 percent from a year earlier, mining declined 0.15 percent while government consumption fell 0.71 percent. Household consumption grew 5.59 percent and investment rose 4.53 percent.

Monetary Policy

Subsidies that keep local fuel prices low have spurred energy imports, straining the trade balance and tying up funds that could be used to build roads, bridges and railways. The current administration has had to cut 2014 budget spending by ministries to fund rising subsidy costs.

“We expect some turnaround in the second half,” said Chua, citing a recovery in exports as well as expected improvements in confidence and investment after the election. “Bank Indonesia cannot afford to ease monetary policy despite lacklustre growth and contained inflation pressures. Focus remains on stability and keeping the current-account deficit in check.”

Investment will expand at least 15 percent this year, a slower pace than last year’s 27 percent, according to estimates given in April by Mahendra Siregar, chairman of the Indonesia Investment Coordinating Board.

Jokowi, the governor of Indonesia’s capital city who ran for president on a platform of concern for common people, won last month’s election, giving him a mandate to govern from October until 2019. The result has yet to be endorsed by the Supreme Court after rival Prabowo Subianto, a former army general, contested the outcome with the Constitutional Court, which is expected to rule by late August.

“Hopes for a recovery largely rest on the new government,” Gareth Leather, Asia economist at Capital Economics Ltd., said in a note today. “Joko Widodo has certainly raised hopes that he could usher in a wave of reforms. However, it is far from clear if the new president will be able to live up to investors’ lofty expectations.”