Indonesia readies more incentives as growth dips to one-year low
This marks the slowest quarterly pace since the 4.94% expansion posted in the same period a year ago
INDONESIA is preparing more measures to boost purchasing power, as a spate of factory closures and job cuts weakened consumption and slowed economic growth last quarter.
Gross domestic product expanded 4.95 per cent in the three months through September from a year earlier, the country’s statistics agency announced on Tuesday. That trails the 5 per cent median estimate of 32 economists in a Bloomberg survey and marks the slowest quarterly pace since the 4.94 per cent expansion posted in the same period a year ago.
Newly inaugurated President Prabowo Subianto is aiming to boost growth to as high as 8 per cent during his five-year term at the helm of South-east Asia’s largest economy. He hand-picked on Tuesday several veterans of previous administrations to act as his economic advisers. Ex-Trade Minister Mari Elka Pangestu and ex-Finance Minister Chatib Basri will sit in the newly set up National Economic Council, reporting to Luhut Pandjaitan, a former senior minister who drove Indonesia’s ambitions to become a battery and electric vehicle maker.
After the council’s meeting with the president on Tuesday discussing the latest GDP data, Pangestu said that the government is planning policies to revive the purchasing power of the middle-class that could be implemented this quarter. “Food prices are relatively high, and we are worried that inflation will rise if oil prices increase,” she said.
Coordinating Minister for Economic Affairs Airlangga Hartarto said that the fourth-quarter growth print could be much better as the government plans to roll out incentives for investment into labour-intensive sectors. He reiterated that full-year GDP growth would likely come in around 5 per cent.
The rupiah gained 0.1 per cent along with other Asian currencies on Tuesday, while the benchmark stock index was up 0.2 per cent.
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While Indonesia’s growth stands out as among the fastest in the region, the cracks emerging in its manufacturing sector could jeopardise employment and consumer spending that are critical to the US$1 trillion economy.
Labour-intensive industries, particularly apparel and footwear, have been suffering from a sharp decline in overseas demand and an influx of cheaper imports. The sector has seen a rising number of factory closures and debt distress, such as at textile giants PT Sri Rejeki Isman, also known as Sritex, and PT Pan Brothers.
Job cuts in Indonesia rose by 31 per cent from a year earlier as of October, reaching nearly 60,000, according to previously released labor ministry data. Manufacturing activity has also contracted for four consecutive months, its longest slump since at least 2021, based on the S&P Global purchasing managers’ index.
Today’s data show Indonesia’s unemployment rate fell to 4.91 per cent in August, from 5.32 per cent in the same month of 2023. But the underemployment rate, which captures those working less than 35 hours a week and still accepting side jobs, jumped to 8 per cent, from 6.68 per cent previously. The proportion of full-time workers also fell slightly to 68 per cent.
Many Indonesians have yet to regain formal employment after the pandemic. About 9.5 million people have fallen out of the country’s middle class – a crucial driving force behind domestic consumption that makes up more than half of GDP.
Consumption growth slowed to 4.91 per cent in the third quarter, dragged by weaker spending on footwear, appliances services, housing and household goods, health and education.
That’s the fourth straight quarter that consumption has struggled to get back to a 5 per cent expansion, indicating weakening purchasing power, said Ahmad Mikail, an economist at PT Sucor Sekuritas in Jakarta, on Tuesday. He expects the trend to continue through the year-end if there is no significant stimuli from the government and the central bank.
Other sectors saw faster growth in the third quarter, with exports at 9.09 per cent, gross fixed capital formation at 5.15 per cent, and government spending at 4.62 per cent. On the production side, transportation and warehousing posted the highest increase at 8.64 per cent, followed by accommodation, food and beverages at 8.33 per cent.
Manufacturing – the industry with the largest contribution to GDP – expanded just 4.72 per cent, led by base metals.
“We expect growth to slow on our measure of activity as lower commodity prices, subdued global demand and tight monetary policy weigh on demand,” Gareth Leather, a senior Asia economist at Capital Economics, wrote in a note on Tuesday.
The government has already unveiled a number of measures to support the local economy, including extending tax perks for house purchases and imposing import duties to protect the local market. Bank Indonesia has also started to lower its benchmark interest rate to help bolster spending and investment, though its easing has been put on hold amid currency volatility. It’s also expanded incentives to banks lending to labor-intensive businesses.
Indonesia will need to reorient its industrial policy towards developing export-oriented service industries for the economy to grow beyond 5 per cent, Citigroup economist Helmi Arman wrote in a note before Tuesday’s data. Refining raw metals onshore – a priority of Prabowo and his predecessor Joko Widodo – has helped boost growth but hasn’t created enough jobs, he said.
“Services exports like tourism are more labour-intensive and may generate more FX conversion,” Arman said. “Yet emphasis on this hasn’t yet been seen in the government programmes.” BLOOMBERG
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