Promised 6-7%-growth in Indonesia looks distant

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Superblocks developed by Agung Podomoro, one of Indonesia?s biggest property developers, is seen in JakartaInvestors should be careful assessing the GDP growth rates in Southeast Asia’s largest economy, analysts say, as it is likely to underperform for some time to come despite promises by president-elect Joko Widodo to return to 6-7 per cent growth figures soon.

August 5 data show Indonesia’s economy was expanding 5.12 per cent on an annual basis in the second quarter, weaker than the first quarter’s 5.21 per cent and still markedly below the 6-7 per cent growth rates enjoyed in recent years.

“Last quarter’s result was especially bad because of fairly poor trade numbers, including a large trade deficit,” said Wellian Wiranto, economist at Singapore’s OCBC bank.

He added that investors shouldn’t expect a sharp uptick in Indonesian growth anytime soon.

“The continued lack of investment is one of the reasons Indonesia continues to perform below its potential GDP rate of between 6 and 7 per cent. The numbers we are seeing at the moment are still way below what Indonesia can achieve,” he said.

The central bank has been forced to hike rates five times over the past year to prop up its flailing currency. A controversial mineral exports ban introduced in January has also proven a headwind to investment and growth.

“We’re not talking about a recession but the performance will remain sub-par,” said OCBC’s Wiranto.

“I think the earliest we will see growth recover to full potential will be in the second half of 2015, as we start to see sentiment improve after the elections, and a steady rise in consumption growth,” he added.

Still, many analysts expect sentiment in Indonesia’s economy – which was badly hit during the Fed tapering fallout in mid-2013 – to improve following the election of a fresh government last month.

The more ‘business friendly’ candidate Widodo was declared the winner of the July 9 Indonesian presidential elections. When he takes office for his five year term in October, he is expected to tackle some of the country’s ongoing structural issues, such as poor infrastructure and deeply ingrained corruption.

Markets have responded positively to the news of his win, and stocks are up 4.4 per cent since the start of the election month on July 1.

But Daniel Martin, economist at Capital Economics, said it would be years before the economy sees growth levels of between 6-7 per cent, as the dual headwinds of high interest rates and low commodity prices continue to weigh on the economy.

“The only thing that might be positive is Widodo’s election, and we’re not overly positive on his presidency. There’s a lot of enthusiasm for him and a lot of people expect reforms, but until we see positive steps, we don’t see growth levels returning to those higher levels over the next few years,” he added.

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Reading Time: 2 minutes

Investors should be careful assessing the GDP growth rates in Southeast Asia’s largest economy, analysts say, as it is likely to underperform for some time to come despite promises by president-elect Joko Widodo to return to 6-7 per cent growth figures soon.

Reading Time: 2 minutes

Superblocks developed by Agung Podomoro, one of Indonesia?s biggest property developers, is seen in JakartaInvestors should be careful assessing the GDP growth rates in Southeast Asia’s largest economy, analysts say, as it is likely to underperform for some time to come despite promises by president-elect Joko Widodo to return to 6-7 per cent growth figures soon.

August 5 data show Indonesia’s economy was expanding 5.12 per cent on an annual basis in the second quarter, weaker than the first quarter’s 5.21 per cent and still markedly below the 6-7 per cent growth rates enjoyed in recent years.

“Last quarter’s result was especially bad because of fairly poor trade numbers, including a large trade deficit,” said Wellian Wiranto, economist at Singapore’s OCBC bank.

He added that investors shouldn’t expect a sharp uptick in Indonesian growth anytime soon.

“The continued lack of investment is one of the reasons Indonesia continues to perform below its potential GDP rate of between 6 and 7 per cent. The numbers we are seeing at the moment are still way below what Indonesia can achieve,” he said.

The central bank has been forced to hike rates five times over the past year to prop up its flailing currency. A controversial mineral exports ban introduced in January has also proven a headwind to investment and growth.

“We’re not talking about a recession but the performance will remain sub-par,” said OCBC’s Wiranto.

“I think the earliest we will see growth recover to full potential will be in the second half of 2015, as we start to see sentiment improve after the elections, and a steady rise in consumption growth,” he added.

Still, many analysts expect sentiment in Indonesia’s economy – which was badly hit during the Fed tapering fallout in mid-2013 – to improve following the election of a fresh government last month.

The more ‘business friendly’ candidate Widodo was declared the winner of the July 9 Indonesian presidential elections. When he takes office for his five year term in October, he is expected to tackle some of the country’s ongoing structural issues, such as poor infrastructure and deeply ingrained corruption.

Markets have responded positively to the news of his win, and stocks are up 4.4 per cent since the start of the election month on July 1.

But Daniel Martin, economist at Capital Economics, said it would be years before the economy sees growth levels of between 6-7 per cent, as the dual headwinds of high interest rates and low commodity prices continue to weigh on the economy.

“The only thing that might be positive is Widodo’s election, and we’re not overly positive on his presidency. There’s a lot of enthusiasm for him and a lot of people expect reforms, but until we see positive steps, we don’t see growth levels returning to those higher levels over the next few years,” he added.

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