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Indonesian Economy Grows at Slowest Pace Since 2010, Exports Fall

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11/05/2012 | 09:57am CEST

-- Indonesia's economy grows at slowest pace in more than two years

-- Investment and private consumption lend support, but exports contract

-- Indonesian investment chief warns global uncertainties may curb growth in 2013

(Rewrites throughout.)

By Andreas Ismar and Farida Husna

JAKARTA--Indonesia's economy grew at its slowest pace in more than two years in the third quarter as the global slowdown hurt demand for commodities, but strong investment and healthy domestic spending still kept it among the world's best performers.

Gross domestic product grew 6.17% on-year in the quarter ending Sept. 30, slower than the previous quarter's 6.37% expansion. The figure matched the median forecast of 12 economists polled by Dow Jones Newswires.

It was the slowest growth rate for Southeast Asia's largest economy since the first quarter of 2010, the Central Statistics Agency said Monday. Crucially, exports were down 2.78% on-year.

"Indonesia needs to be vigilant about global conditions as exports are serving as a drag on growth," said Chatib Basri, head of the country's investment board. "This data are a warning that we need to be prepared amid uncertain global conditions...The challenge is not in 2012, but lies in 2013."

In sequential terms, the economy grew 3.21% from the second quarter--slightly below economists' median forecast of 3.28% but faster than the previous quarter's 2.80% rise.

Indonesia in recent years has been one of the bright spots of the global economy, clocking 6.5% growth last year, its fastest rate since the Asian financial crisis in the late 1990s.

As a major producer of palm oil, coal, rubber and tin, however, Indonesia is now feeling the brunt of slumping commodity prices and slower demand from China and India. That is a shift from the global financial crisis, when demand from China and India supported the archipelago's exports.

"We have noted previously that the near-term risk for the economy lies with the growing dependence on its commodity sector," OCBC economist Gundy Cahyadi said. "It remains to be seen how rapidly export growth will recover, with our expectation right now penciling it in the second half of 2013."

The government expects the economy to grow 6.1%-6.5% this year, and said it could be slightly higher in 2013. The World Bank has forecast 6.0% growth for Indonesia this year.

Investment rose 10.02% in the third quarter from a year earlier. Private consumption expanded 5.68%, its strongest pace since the beginning of 2009.

"It's quite remarkable to see that investment growth has remained resilient in the third quarter, with double-digit growth possibly also supported by lots of infrastructure work," OCBC's Mr. Cahyadi said.

Despite the strong investment figures, the outlook is unclear. Authorities in recent months have issued a slew of regulations that some see as protectionist: slapping an export tax on raw mineral ahead of a full export ban in 2014, requiring foreigners to divest more of their ownership in the mining sector and tightening limits on ownership of Indonesian banks.

Businesses have warned that the government could opt for more populist policies ahead of 2014 presidential and parliamentarian elections, which also could deter investment.

In addition, inflationary pressures are fueling labor protests for higher wages. Last month laborers from the greater Jakarta area demanded raises of nearly 70%, to 2.7 million rupiah ($280) per month.

"The rising labor protests have taken the shine off Indonesia as one of the most attractive investment destinations," said Ade Sudrajat, chairman of the Indonesian Textile Association.

By sector, transportation and communication rose 10.48% from a year earlier, followed by construction at 7.98%, and finance and real estate at 7.41%.

Mining was the only sector to contract, down 0.1% on-year in the third quarter.

--I Made Sentana and Linda Silaen contributed to this article.

Write to Andreas Ismar at andreasismar.sandiwan@dowjones.com and Farida Husna at farida.husna@dowjones.com

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