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Indonesia economy seen slowing further in Q1, highlights Widodo's challenge

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Indonesia's economy is expected to have slowed further in the first quarter as falling exports, weak domestic consumption and policy inertia raise doubts about President Joko Widodo's promise to spur a revival in growth and investor confidence.

[JAKARTA] Indonesia's economy is expected to have slowed further in the first quarter as falling exports, weak domestic consumption and policy inertia raise doubts about President Joko Widodo's promise to spur a revival in growth and investor confidence.

Jakarta's benchmark stock index has dived 5.5 per cent over the past week as corporate earnings have lagged expectations, while the rupiah is down around 5 percent this year - the worst performance among emerging Asian peers.

Analysts are suitably downbeat on Southeast Asia's biggest economy, with a Reuters poll of 18 analysts predicting Tuesday's gross domestic product (GDP) data to show growth of 4.95 per cent in the first quarter, compared with 5.01 percent year-on-year in October-December quarter.

"The effects of lower commodity prices will have continued to feed into the real economy in Q1, and relatively high interest rates are also applying a brake," said Dan Martin, economist at Capital Economics in Singapore.

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A raft of key indicators have raised concerns about the outlook, with the Reuters poll forecasting full-year 2015 growth at 5.3 per cent, below the government's 5.7 per cent target.

Domestic consumption remains weak, while the collapse of commodity prices have seen exports slumping 11.67 per cent in the first quarter year-on-year. Imports also fell 15.10 per cent.

That has sapped Indonesia's manufacturing sector, where activity shrank for the seventh straight month in April as export orders continued to decline and domestic demand remained weak, an HSBC Markit survey showed on Monday.

One bright spot is the upturn in foreign direct investment (FDI) in the first quarter, but falling cement sales seem to indicate that overall investment remains sluggish.

While the economy is struggling to motor on after slowing to 5-year lows in 2014, the danger of capital flight as the US Federal Reserve moves to raise rates later this year is limiting Indonesia's policy options.

Annual inflation in April, meanwhile, ticked up to 6.79 per cent, from 6.38 percent in March - another factor likely keeping the central bank sidelined for now after it cut rates in February by 25 basis points to 7.50 per cent.

President Widodo who came to power six months ago with strong business-friendly credentials and a promise to beef up the country's creaking infrastructure, has been hamstrung by rifts inside his own political party and squabbles between government agencies.

While Mr Widodo has slashed fuel subsidies and freed up billions of dollars for long-neglected capital spending, many infrastructure projects are tied up in red tape. "The president's plans to ramp up infrastructure are encouraging, but it will be a while before projects get off the ground. There's a danger that growth will get stuck below 5 percent over the coming quarters," Capital Economics' Martin said.

The tide of negative trends has prompted Finance Minister Finance Bambang Brodjonegoro to acknowledge that growth this year could slow to 5.2 per cent, the first time he's conceded that the official target could be missed.

REUTERS

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