Thu, 06 Aug 2015
From: Reuters
Indonesia's economic growth in the second quarter dropped to its slowest since 2009, with prices for commodity and energy exports remaining weak and President Joko Widodo unable to push badly needed infrastructure projects past bureaucratic snarls.

Southeast Asia's largest economy expanded 4.67% in April-June compared to the same period a year ago, better than a Reuters poll forecast of 4.61%, but still below the revised estimate of 4.72% growth for the January-March quarter.

Falling commodity prices and the government's strict regulation on shipments of ore weighed on the mining sector, the head of the statistics bureau Suryamin said, resulting in the sector contracting 5.87% in the June quarter.

Consumption, investment and imports were all weaker.

Meanwhile, the government's contribution to GDP failed to show much improvement on the first quarter. The government said it spent less than 40% of its budget up through June, with capital expenditure particularly weak.

"We expect growth in the second half to pick up on the back of investment, although we don't think government infrastructure spending will be as big as we initially expected," said Leo Putra Rinaldy, an economist at Mandiri Sekuritas in Jakarta.

"The government is facing challenges in revenue collection, which mean there could be spending cuts to control the deficit. Those spending cuts could come from infrastructure spending," he added.

Widodo's nine-month-old administration has failed to deliver significant economic reforms, and the central bank is poorly placed to boost the economy, with inflation rising and the rupiah vulnerable to outflows once US rates rise.

On Tuesday Bank Indonesia governor Agus Martowardojo said authorities were closely watching the risk of a further slowdown, while noting the uncertainties posed by an anticipated rise in US interest rates that will probably suck money away from emerging markets like Indonesia.

Although the government had not succeeded in improving spending in the second quarter, Finance Minister Bambang Brodjonegoro still believes GDP growth will rebound significantly on the back of higher fiscal spending.

"(Capital spending) may reach 80-85% which would make growth in the second half better," he said on Tuesday.

Brodjonegoro also said some fiscal policies were more effective in the second half, including tax incentives to attract investment, and a hike in the threshold of income tax to drive up people's purchasing power.

But analysts remained sceptical. "Looking ahead, while we don't think growth will slow further, we don't see scope for much of a rebound either. Lower commodity prices, which have led to a slump in export revenue and a sharp deterioration in Indonesia's terms of trade, will continue to weigh on the economy," said Gareth Leather, an analyst with Capital Economics in London.

The government expects GDP growth of 5.2% this year, whereas the median forecast from a Reuters poll of analysts was for growth of 4.9%.





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