Indonesia Economy Stumbles: Exports Falter, Growth Slows to Two-Year Low

Indonesia Economy Stumbles: Exports Falter, Growth Slows to Two-Year Low

Nov. 6 : Indonesia’s economic performance in the third quarter has shown solid growth; however, it has slowed more than anticipated, marking its weakest performance in two years. This deceleration is attributed to a decline in exports and softened household spending.

The gross domestic product (GDP) expanded annually by 4.94% in the July-September quarter, falling short of economists’ expectations of 5.05% and a decrease from the 5.17% growth in the second quarter. Experts had widely anticipated a cooling of Southeast Asia’s largest economy this year due to various factors, including domestic interest rate hikes, falling commodity prices, and global economic weakening.

Last month, there was a surprise rate hike by Bank Indonesia, which aimed to stabilize the depreciating rupiah currency. This increase marked a total of 250 basis points in rate hikes since the previous year.

“While a sub-5% growth rate is still respectable, it serves as a warning for our monetary authority not to be overly aggressive with rate hikes,” cautioned Myrdal Gunarto, an economist at Maybank Indonesia, who predicts one more rate hike of 25 basis points.

Despite the disappointing GDP figures, the rupiah has strengthened, trading 1.3% higher than the previous day’s close, mainly due to a softer U.S. dollar.

For the current quarter, spending related to election campaigns and the government’s recent welfare budget increase are expected to provide some support to the economy, as noted by Joshua Pardede, chief economist at Bank Permata. The government had launched a policy package last month, which included tax cuts for homebuyers, extensions of rice subsidies, and additional cash assistance. Presidential candidates and political parties are gearing up for the general elections on February 14.

Pardede forecasts full-year 2023 growth at 5.07%, slightly below the government’s projection of 5.1%. This comes after Indonesia experienced economic growth of 5.3% in 2022, marking the highest level in nine years, driven by a global commodity boom.

In the July-September period, the decline in exports deepened to 4.26% from 2.97% in the second quarter, and government spending also fell year-on-year. Household spending, which represents a significant portion of GDP, decelerated to 5.06% from 5.22%. The agriculture sector was additionally impacted by drought caused by the El Nino weather pattern, with the peak of its effects expected in October.

A positive aspect in the GDP breakdown was the growth in investment, which recorded a 5.77% increase in the third quarter, compared to 4.63% in the second quarter. On a non-seasonally adjusted quarter-on-quarter basis, Indonesia’s GDP expanded by 1.6%, slightly below the anticipated 1.71% growth.

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