Indonesia's GDP growth resilient in 2018 but risks loom

Indonesia

JAKARTA: Indonesia posted better than forecast GDP growth in the October-December quarter and for the full-year, but the outlook in 2019 looks less rosy as Southeast Asia's largest economy braces for elections and likely spillover from U.S.-China trade frictions.

Consumption, investment and government spending lifted gross domestic product in the final quarter of 2018 by 5.18 percent from a year earlier, a tick faster than the third quarter and also ahead of the 5.11 percent forecast in a Reuters poll.

Full-year 2018 growth was 5.17 percent, beating the poll's 5.15 percent prediction and marking a third year of a pick-up after the pace dropped to 4.88 percent in 2015.

The rupiah strengthened slightly after the data, while the stock market and bond prices went up.

While last year's growth was the best since 2013, it missed the government's 5.4 percent target and the 7 percent President Joko Widodo had pledged to reach when campaigning for election in 2014.

The GDP data is the last before Indonesians go to the polls on April 17. Widodo is seeking a second five-year term and once again faces former general Prabowo Subianto, who has accused his administration of economic mismanagement.

In his first term, Widodo has been credited with building new infrastructure across the archipelago, controlling inflation and helping retain economic stability despite bouts of capital outflows tied to tighter monetary policy in the United States.

But he also froze fuel and electricity tariffs in 2018 to support purchasing power, a policy credited by analysts for underpinning domestic consumption but also denting his reform credentials.

EXPORTS WEAKENING

This year, Widodo may face an even tougher job propping up growth with net exports contracting in the last three quarters, said Josua Pardede, an economist with Bank Permata in Jakarta.

"It's a challenge to push net export performance up amid the (U.S.-China) trade war and China's economic slowdown," he said, predicting the economy would grow around 5.1-5.2 percent this year.

Tighter liquidity in the domestic financial system, after six rate hikes in 2018 and government absorption of funds through bond sales, could also hamper growth.

This could be partly offset by election-related spending helping consumption and better productivity from infrastructure projects, such as a subway in Jakarta, analysts said.

"We expect Indonesia's GDP growth to ease in 2019 against a backdrop of slowing global growth," ANZ said in a statement, pencilling in a growth rate at the lower end of Bank Indonesia's (BI) 5.0-5.4 percent target range.

The government's growth target this year is 5.3 percent.

The statistics bureau said household spending, which represents more than half of Indonesia's GDP, grew a touch faster in the fourth quarter.

Consumption and investment remained the main growth drivers last year, while government spending also expanded. Net exports, however, dragged growth down by nearly 1 percentage point.

This year, investment may be restrained because investors will take a "wait-and-see" attitude until elections are over, said Myrdal Gunarto, an economist at Maybank Indonesia.

Gunarto said the government should focus on maintaining growth in consumption to offset soft exports.

The state-owned Eximbank has already been tasked to provide lenient export financing and the trade minister said he might scrap surveyor requirements for some exports.

BI Governor Perry Warjiyo has also said interest rates are near their peak, suggesting a reduced chance of further interest rate increase hitting growth.

But Bank Central Asia chief economist David Sumual said despite a rebound in the rupiah from a 20-year trough and low inflation, BI may have little room yet to cut rates due to a yawning current account deficit.

"I think BI will keep its policy unchanged in the first half due to many uncertainties, but things may change entering the second half," Sumual said. - Reuters