Indonesia’s economic growth for Q1 was recorded at 4.71 percent. Despite foreseen expectations that the GDP growth figure would be lower than five percent, the recorded GDP growth was worse than expected. Experts attribute this result to weak exports, a high interest rate environment, lower crude oil prices, and sluggish government spending.
Being a large commodity exporter, with plunging commodity prices in recent years coupled with a slowing economic expansion in China and Japan— two key trading partners of Indonesia that comprise nearly a fifth of Indonesia’s non-oil & gas exports— the export performance of Indonesia has weakened accordingly. The country’s exports fell 11.7 percent year-on-year to US$39.1 billion in Q1.
Apart from weak exports, another factor affecting the country’s economic growth is that the Indonesian central bank (Bank Indonesia) continues to uphold a high interest rate environment with its key rate of 7.50 percent that limits people’s purchasing power. However, the bank is also unable to cut its interest rate drastically to support domestic economic expansion due to the country’s high inflation, current account deficit and looming capital outflows ahead of higher US interest rates.
In a recent May report, Indonesia’s inflation rate was reported to have accelerated to 6.79 year-on-year. Experts reason this higher inflation is due to higher transportation costs following a fuel price hike in late March, as well as the 0.50 percentage point increase in food, beverages, cigarettes & tobacco expenditure group.
Experts foresee the possibility of the country’s economic growth to slip slightly below the World Bank’s current growth estimate of 5.2 percent for the year. In combination with tightening global financial conditions, a weak rupiah and limited fiscal room for the government to boost the economy through infrastructure investment, this will cause stagnating economy growth of the Indonesian economy.
Affecting by declining export orders and continued weak domestic demand, Indonesia’s manufacturing sector continues to contract, making April the seventh consecutive month of declining manufacturing activity. With rising costs of imported raw materials due to the weak rupiah, Indonesian businesses are unable to price their products competitively in international markets. Further, the sector has been affected by non-conducive weather conditions and employment cuts. Conditions are expected to remain tough for the rest of the year.
