Indonesian Economy Shrinks a Second Quarter; Rupiah Declines

Indonesia’s economy unexpectedly shrank for a second straight quarter as
exports and government spending dropped, underscoring the challenge for
President Joko Widodo as he seeks to reinvigorate growth. The rupiah fell.

Gross domestic product contracted 0.18 percent in the three months ended
March 31 from the previous quarter, the statistics bureau said in
Jakarta on Tuesday. That compares with the median estimate of a 0.25
percent expansion in a Bloomberg survey of 10 economists. The economy
grew 4.71 percent from a year earlier, missing most estimates in a
separate survey.

Widodo, known as Jokowi, took office in October pledging to increase
infrastructure spending, boost investment and achieve 7 percent
expansion by 2017 in Southeast Asia’s largest economy. Those efforts
have been complicated by a slowdown in the country’s key commodity
exports, while the consumer spending that has supported growth in the
past is showing signs of softening on a weak rupiah and higher prices.

“With monetary policy hamstrung by rising inflation, the government will
need to fast track infrastructure spending and get rupiah on the
ground,” Glenn Maguire, a Singapore-based economist at Australia & New
Zealand Banking Group Ltd., said after the data. “Government spending is
leading the slowdown and must be activated efficiently.”
Corporate Downgrades

The rupiah dropped 0.5 percent against the dollar to 13,044 as of 3:31
p.m. in Jakarta. It is the biggest decliner this year among 11 Asian
currencies tracked by Bloomberg. The Jakarta Composite Index erased
gains immediately after the GDP report.

Weaker-than-expected growth may lead to more corporate earnings
downgrades in 2015, according to Arief Wana, director at PT Ashmore
Asset Management Indonesia.

The quarterly contraction in the first three months was led by a 49
percent drop in government spending, while exports dropped 6 percent,
the statistics office said. The agency cited slowing growth in China and
Singapore, as well as weak crude oil prices for weaker overseas sales.

The government was confident growth will pick up in the second and third
quarters in line with greater spending on infrastructure, Coordinating
Minister for Economic Affairs Sofyan Djalil told reporters after the GDP
data.

“We have to work hard,” he said. “The most important thing is that the
government is given time.”

While two consecutive quarterly contractions can be considered a
technical recession, in Indonesia’s case the first quarter shouldn’t be
compared with the fourth quarter because of government spending
patterns, said Suryamin, the head of the statistics office. Indonesia
doesn’t seasonally adjust its quarter-on-quarter growth figures.

“The fourth quarter always contracts because it’s compared with the
third quarter, when most government spending is disbursed,” Suryamin said.
More Fragile

Finance Minister Bambang Brodjonegoro, who had predicted year-on-year
growth in the first quarter might fall below 5 percent, said in an
interview on May 3 that the government had to spend “more and quicker”
to fight the slowdown.

The economy grew 5.02 percent in 2014, the slowest pace in five years.
The government is targeting 2015 growth of between 5.4 percent and 5.7
percent. The median estimate in a Bloomberg survey is 5.3 percent.

The 2015 first-quarter figure was the slowest year-on-year growth since
the third quarter of 2009, according to data compiled by Bloomberg. It
may trigger downgrades in economists’ 2015 growth estimates, according
to a research note by Santitarn Sathirathai, a Singapore-based economist
for Credit Suisse, whose 5.1 percent forecast was “very much at risk”.

The government has a goal to spend 290 trillion rupiah ($22 billion)
this year on infrastructure. It had spent 7 trillion rupiah as of April
27, the finance minister said.

“Indonesia is looking more ‘fragile’ with each passing day,” said
Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
“It’s not just that the economy is slowing sharply, but also that
President Widodo is struggling to assert his authority on Indonesian
politics.”