Despite Election Uncertainty, Indonesia’s Growth Expected to Remain Above 6%

By webadmin on 08:38 am Nov 29, 2012
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Muhamad Al Azhari

Boosted by consumer spending, Indonesia’s economic growth will remain above 6 percent next year, but the economy and political environment might be affected by general elections scheduled for 2014, two bank economists say.

Citibank Indonesia forecasts the economy to grow 6.1 percent in 2013, slowing from an estimated 6.2 percent this year.

Strong growth will be seen in capital-intensive industries such as chemical, metal and automotive to meet strong domestic demand.

Growth in sectors such as construction, retail and domestic-oriented manufacturing will counter the harm of weaker exports, Helmi Arman, an economist at Citibank Indonesia, said in his outlook report for 2013.

Private consumption accounts for about 60 percent of the country’s economic activity, and low borrowing costs are encouraging consumers to take out loans for purchases on cars, motorcycles and homes.

Indonesia’s economy expanded 6.2 percent in the third quarter of this year. Last year, the economy grew 6.5 percent, the fastest pace since 1996.

Eugene Leow, a Singapore-based economist at DBS Group Holdings, shared Helmi’s bullish view. Leow forecasts Indonesia’s economy to grow 6.3 percent next year from 6.1 percent this year.

This year Indonesian consumers are enjoying robust growth amid relatively low inflation and interest rates.

The central bank has kept its key interest rate at a record low 5.75 percent since February in a bid to maintain economic growth.

“However, the situation is set to change slightly. Monetary policy accommodation will be gradually withdrawn and credit growth is expected to slow,” Leow said. “Domestic demand is still strong, but will moderate amid further monetary tightening.”

Still, heightening political tensions ahead of the 2014 elections for the House of Representatives and the presidency may push workers to demand higher wages, potentially deterring overseas companies from doing business in Indonesia. That might also affect money flows, mainly foreign direct investment, into Indonesia.

The minimum wage in Jakarta, for example, will rise by 44 percent to Rp 2.2 million ($229) per month next year. Other regions, Helmi noted, may see double-digit increases next year, but “the wage hikes should not overturn Indonesia’s positive FDI outlook,” Helmi said.

“In the year heading towards the 2014 elections, there will be particular focus on the country’s political dynamics and the extent to which they affect the economic environment,” he said.

“Recent issues such as the Constitutional Court rulings, increased outside perception of resource nationalism and rising wage pressures exemplify these spillovers,” he added.

On Wednesday the Philippine government reported that its economy in the third quarter expanded by 7.1 percent, aided by domestic demand and government spending.