Analysis of Indonesia’s 5.62% Economic Growth Rate (GDP) in Q3-2013

The Q3-2013 GDP growth result of 5.62 percent (yoy) constitutes the fifth consecutive month of slowing economic growth. Most important factors that contributed to the falling growth rate were the continuous depreciating rupiah exchange rate, high inflation, diminished foreign capital inflows (capital markets and foreign direct investments), higher interest rates and the lack of improvement in commodity prices (thus reducing the value of Indonesian exports).

Indonesia's Economic Growth 2009–2013 (annual percentage change)

Year	Quarter I	Quarter II	Quarter III	Quarter IV
2013	6.05	5.83	5.62	-
2012	6.29	6.36	6.16	6.11
2011	6.45	6.52	6.49	6.50
2010	5.99	6.29	5.81	6.81
2009	4.60	4.37	4.31	4.58

^{Source: Statistics Indonesia (BPS)}

After the Federal Reserve began speculation about an end to its massive monthly USD $85 billion bond-buying program (known as quantitative easing) in May 2013, foreign investors quickly pulled money out of risky assets in emerging economies, while the US dollar started appreciating due to the expected decrease in US dollar liquidity. Emerging economies that showed weaknesses in their financial make-up were hit hardest. In the case of Indonesia, investors were highly concerned about its USD $9.8 billion current account deficit in the second quarter of 2013 (equivalent to 4.4 percent of the country’s GDP) and thus pulled money out of the country’s financial markets. This resulted in a significant exacerbation of rupiah depreciation. Between 31 May and 7 November 2013, the currency depreciated 16.2 percent against the US dollar:

| Source: Bank Indonesia

The benchmark stock index of Indonesia (the Jakarta Composite index or IHSG) has shown the same pattern. Between 31 May and 7 November 2013, the index fell 11.5 percent as investors, particularly foreign ones, left the market:

A domestic factor that contributed to slowing economic growth is the current high level of inflation. After prices of subsidized fuels were raised in June 2013 (by an average of 33 percent) in order to relieve the government’s budget balance, Indonesia has had to cope with high inflation (8.32 percent yoy in October 2013). High inflation curtails people’s purchasing power and thus impacts on the country’s economic expansion as household consumption accounts for approximately 58 percent of the country’s total GDP growth.

The weakening rupiah exchange rate and high inflation were reasons for Indonesia’s central bank (Bank Indonesia) to raise its benchmark interest rate (BI rate) gradually from 5.75 percent to 7.25 percent. Besides the BI rate, Bank Indonesia also took other measures to curb credit loans (involving mortgages and credit loans for car and motorcycle purchases) as the institution was concerned about the possibility of economic bubbles due to high credit growth. All these measures combined have resulted in a higher interest rate climate and come at the expense of economic growth.

Total realized investments in Indonesia have also slowed down. In Q3-2013 investments grew 22.9 percent (yoy), which is about two percentage points lower than the growth pace in the previous year. Compared to the second quarter of 2013, total realized investments in Indonesia grew only 0.7 percent. The government has already reacted by announcing to revise the Negative Investment List (which lists sectors that are closed to foreign investments). A number of (sub) sectors will be opened up to foreign investments. By the end of 2013, the government is expected to release the revised list.

Meanwhile, Indonesian exports continue the falling trend in terms of value due to low global commodity prices. Commodities, particularly raw commodities, account for approximately sixty percent of total exports. As such, Indonesia is hit hard when commodity prices fall.

In terms of geography, GDP growth is still dominated by Java, Indonesia’s most populous and most developed island. In Q3-2013, Java contributed 58.20 percent to total GDP growth, followed by Sumatra (23.75 percent). Thus, these two islands (located in the western part of Indonesia) account for the lion's share of Indonesia’s economic expansion. Most of the other islands are situated in a more-or-less economic vacuum (the eastern part), which is less densely populated and located further away from the important international hubs such as Singapore.

Regional Contribution to GDP Growth

Island	Third Quarter 2013    Contribution to GDP (%)
Java	58.20
Sumatra	23.75
Kalimantan	8.45
Sulawesi	4.87
Other Islands	4.73
Indonesia	100

^{Source: Statistics Indonesia (BPS)}

Statistics Indonesia also announced that it has revised the GDP growth results of the first and second quarter in 2013. The revised growth figures are 6.05 percent (up from 6.03 percent) in Q1-2013 and 5.83 percent (from 5.81 percent) in Q2-2013.

Forecasts for the fourth quarter do not differ markedly from the Q3-2013 GDP growth result. Current forecasts for full-year economic growth in 2013 range between 5.8 and 5.9 percent as investments and household consumption will still be slowing down in the fourth quarter after the BI rate was raised, while exports are not expected to improve yet.

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