The great consumption engine that powers Indonesia’s economy is spluttering a little, prompting calls for further stimulus measures and underlining the need for foreign investor-friendly reforms.
Some economists believe the central bank will resume rate cuts when it meets later this month, in the wake of national accounts showing the economy grew by by just over 5.02 per cent year-on-year in three months to September 30.
This is down from 5.05 per cent in the second quarter and the weakest result in two years.
The intensive campaigning that accompanied the April 17 presidential and parliamentary elections and the lift in private spending triggered by the Ramadan fasting month and Eid-ul Fitr in June go some way to explaining the relatively weaker third-quarter growth rate.
However, underlying consumption trends are still likely to trigger further monetary policy easing.
Nomura economists are among those tipping a 25 basis point cut on November 21, citing Bank Indonesia’s “clear pro-growth stance”.
“We think the Q3 data release will be an important input for the board’s discussion in November, particularly slower domestic demand conditions,” they wrote in a research note.
Together, government and consumer spending account for about 63 per cent of GDP.
While this insulates the economy from global headwinds, any dips in consumption are consequential. Spending on staples, including food, has slipped slightly, while those on higher incomes have been reluctant to purchase big-ticket items.
Sales data from the Association of Indonesian Automotive Manufacturers, for example, show 753,600 units were sold in the nine months to end-September, down 12 per cent on the corresponding period last year.
BCA chief economist David Sumual also called out the slump in investment in the September quarter, which grew by a comparatively paltry 4.2 per cent year-on-year.
“This decline is very much expected given the slowdown in loan growth, and in public companies’ capital expenditure spending over the last two quarters,” he said.
“There is probably very little incentive for companies to invest at this point, given declining utilisation rate, weakening revenue, and uncertain prospects.
“This may imply an increasing reliance on government [and] state-owned enterprise-led infrastructure projects to lead the way, even though there is already some signs of slowdown in construction activities,” Mr Sumual said.
While some believe a shortfall in tax revenues could crimp government spending, finance Minister Sri Mulyani has already indicated she will allow the deficit, that was forecast to be 1.9 per cent, to swing out to 2 per cent, giving the government some more spending firepower.
At a press conference in Jakarta on Wednesday, President Joko Widodo defended the GDP result, noting it was better than many others. “More than 5 per cent is good, [especially when] compared with other countries that are already minus,” he said.
“Some are going to zero, some are reduced to 1.5-2 per cent. Some used to be 7 per cent and have now dropped. We should be grateful.”
However, in line with a long-term goal to broaden the country’s trade and investment base, the President has also signalled that attracting foreign investment will be a key focus for his second-term government. Observers note there is plenty of scope.
Peter Tinley, Western Australia’s Minister for Asian Engagement – in Indonesia this week to scout out opportunities and build ties – says there is big scope to increase bilateral trade, especially given the tariff cuts in the Indonesia-Australia free trade deal that both countries hope to ratify in coming months.
However, regulatory hurdles remain.
“Indonesian Ministers are free to issue their own regulations,” Mr Tinley said.
“There are currently over 6000 ministerial degrees that can impact on commodities in terms of point and entry and volumes.
“So regulatory reform is really, really important. That is the thermometer that will tell us whether conditions are right,” he said.