Indonesia's economic growth slows in first quarter

The rupiah slid to its weakest level since January 2016, at 13,980 to the US dollar. The tepid growth rate could put the central bank in a bind at its May 16-17 policy meeting. Its governor has said it could raise rates to halt further rupiah depreci
The rupiah slid to its weakest level since January 2016, at 13,980 to the US dollar. The tepid growth rate could put the central bank in a bind at its May 16-17 policy meeting. Its governor has said it could raise rates to halt further rupiah depreciation if that threatened the inflation target or financial stability.PHOTO: REUTERS

JAKARTA • Indonesia's economic growth pace in January to March fell slightly from the previous quarter, reflecting still-weak consumption and indicating that the government may struggle to meet its 2018 growth target.

The rupiah slipped to its weakest level since January 2016, in mid-afternoon trading, at 13,980 to the United States dollar.

The tepid growth rate could put Bank Indonesia in a bind at its May 16-17 policy meeting. Its governor has said the central bank could raise rates to halt further rupiah depreciation if that threatened the inflation target or financial stability.

President Joko Widodo had promised to lift gross domestic product (GDP) growth to 7 per cent during his five-year term - which ends next year - by inviting investment and cutting reliance on consumption as a growth engine.

But despite moves to build infrastructure, streamline regulations, attract investors and keep prices stable, as well as 200 basis points of cuts in Bank Indonesia's policy rate, the annual economic growth has stayed close to 5 per cent for years. Last year's 5.07 per cent clip was the best since 2013. The government is targeting 5.4 per cent growth this year.

In the January to March period, South-east Asia's largest economy expanded 5.06 per cent on an annual basis, the statistics bureau said yesterday, weaker than the previous quarter's 5.19 per cent and a Reuters poll forecast of 5.18 per cent.

"The combination of weaker headline GDP growth as well as stable CPI (consumer price index) inflation in April suggests that a Bank Indonesia rate hike at its next meeting is not a done deal," said Mr Euben Paracuelles, an analyst at Nomura in Singapore, referring to last month's 3.41 per cent annual inflation.

Mirae Asset Sekuritas research head Taye Shim said a softer rupiah could challenge growth prospects.

A weak currency could put pressure on the finances of firms with high levels of foreign debt or those reliant on imported raw materials.

Bank Indonesia's next policy meeting will be the last under Governor Agus Martowardojo. Incoming governor Perry Warjiyo has previously vowed to support growth while maintaining stability.

ANZ said Bank Indonesia has room to keep its key rate unchanged before starting a hiking cycle in the second half of next year.

The statistics bureau said the nearly 8 per cent annual growth in investment in January to March was "very significant", though consumption once again lagged.

Private consumption, accounting for over half of GDP, expanded just below 5 per cent, a fraction under the previous quarter's pace.

Weak consumption has been a key factor weighing on growth and the government has announced price control measures on basics such as fuel and rice, aimed at keeping inflation low and purchasing power high.

Mandiri Sekuritas economist Leo Putra Rinaldy said consumption may accelerate in the second quarter because of spending for holidays before and during the Islamic fasting month and on campaigns for regional elections.

Meanwhile, imports accelerated 12.8 per cent from a year earlier, far outstripping a 6.2 per cent increase for exports.

Finance Minister Sri Mulyani Indrawati said the government would work with the business community to stimulate investment and encourage more exports to take advantage of a weak rupiah. She predicted higher economic growth in the second and third quarters as consumption strengthens during the fasting month and as Indonesia hosts the Asian Games in August.

REUTERS

A version of this article appeared in the print edition of The Straits Times on May 08, 2018, with the headline 'Indonesia's economic growth slows in first quarter'. Print Edition | Subscribe