Indonesia expected to grow up to 5.05% in Q3, led by strong demand, investment

[JAKARTA] Indonesia’s economic growth likely maintained a steady upward trajectory in the third quarter, with analysts projecting growth for those three months at between 4.9 and 5.05 per cent, driven by robust demand and increasing investment.

Indonesia’s statistics bureau is set to release its official third-quarter gross domestic product figures on Nov 5.

Economists surveyed by Bloomberg said that this stable performance is laying a solid foundation for newly inaugurated President Prabowo Subianto, who aims to nearly double this growth rate to an ambitious 8 per cent average over his next five years in office.

Lavanya Venkateswaran, senior Asean economist at OCBC, noted that Indonesia’s third-quarter growth will likely mirror its second-quarter performance of 5 per cent, reflecting consistent growth momentum. The bank projects third-quarter growth to be between 4.9 and 5 per cent.

“President Prabowo has inherited an economy which is on steady growth footing, with inflationary pressures relatively manageable, and fiscal deficits in check,” she told The Business Times.

Enrico Tanuwidjaja, Asean economist at UOB, anticipates a modest rise in Indonesia’s third-quarter growth, projecting it to reach 5.1 per cent. This increase is expected to stem from robust private consumption and vigorous investment activity.

Foreign direct investment in Indonesia grew nearly 19 per cent in the third quarter to 232.65 trillion rupiah (S$19.6 billion).

This surge particularly benefits the mining and metal refining sectors, following Indonesia’s 2020 ban on nickel ore exports – a strategic decision designed to attract investors and strengthen the electric vehicle supply chain.

Tanuwidjaja emphasised that government spending and large-scale infrastructure projects are critical in maintaining this positive momentum.

UOB expects a 5.2 per cent growth forecast for the year, supported by steady domestic demand and expected fiscal stimulus under Prabowo’s new administration.

“Many of the pump-priming policies, along with the continuation of current capital-intensive projects related to downstream initiatives, will likely sustain a slightly elevated growth trajectory,” Tanuwidjaja said.

Brian Lee, an economist at Maybank, said that despite Prabowo having inherited a stable economy from the previous administration, his government still faces the challenge of driving economic growth towards its 8 per cent target, all while maintaining investor confidence through prudent fiscal policies.

He said: “The shrinking middle class and de-industrialisation are two (related) setbacks that need to be addressed. To tackle these, the government must identify new sources of growth that can propel the economy forward.”

Sluggish exports

Although rising global commodity prices this quarter are fuelling optimism for improved trade performance in Indonesia, sluggish exports continue to hold it back.

This ongoing weakness is largely due to recovering global demand, as evidenced by the declining sales of essential commodities like palm oil, copper ore and coal to key trading partners.

In September, exports to China, Indonesia’s largest trading partner, made a year-on-year (yoy) decline of 6.27 per cent, amounting to a total of US$42.5 billion.

Hosianna Evalita Situmorang, an economist at Bank Danamon, emphasised that despite the positive outlook for palm oil and coal prices, the government must focus on expanding markets and strengthening its role in the global supply chain.

“Indonesia holds a strategic position, particularly in processed minerals and semiconductors, which are expected to see significant demand in the future,” she noted.

In September, Indonesia’s exports declined by 5.8 per cent from the previous month, totalling US$22.1 billion. Yoy growth also slowed, with exports rising by 6.44 per cent compared to 7.13 per cent in August. 

Wild cards

While optimism surrounds Indonesia’s prospects to sustain growth at around the 5 per cent mark, economists caution that this promising trajectory faces significant hurdles.

The looming spectre of global geopolitical tensions and market volatility is casting a shadow over South-east Asia’s largest economy, as it is with the region and even most of the world, threatening to disrupt Indonesia’s economic momentum.

In a recent meeting, Indonesia’s Financial System Stability Committee – led by the finance minister, the governor of Bank Indonesia and other key financial authorities – voiced concerns over the ripple effect of a slowing global economy and volatile financial markets, now further strained by the rekindled conflict between Iran and Israel in the Middle East.

Minister of Finance Sri Mulyani Indrawati said the nation is monitoring the situation, aware that any escalation in the region could trigger speculative spikes in global oil prices and bring potential economic headwinds.

The rupiah, alongside other emerging market currencies, is feeling the pinch of depreciation as robust signals from the US economy strengthen the dollar.

Radhika Rao, senior economist at DBS, flagged the upcoming US elections as a potential “wild card” that could significantly affect the rupiah’s outlook. Investors are wary of the possibility of new trade barriers, which could ignite inflation and push the Federal Reserve towards a more hawkish stance.

In October, US Treasury yields have stubbornly remained above 4 per cent, driving yields higher across emerging markets, including Indonesia.

The 10-year government bond yield has surged above 6.65 per cent, while the two-year yield has also climbed over 6.4 per cent, reflecting a rise of about 20 basis points from recent lows.

Rao said: “Volatility in the rupiah and IDR rates is bound to continue over the coming fortnight, against this backdrop and trickle of relatively firmer US data, compelling the central bank to temper its dovish talk.”