Indonesia 2Q GDP Growth Slows to 5.12% -- Update

By Andreas Ismar 

JAKARTA--The Indonesian economy grew at its weakest pace in almost five years in the latest quarter, weighed down by an ore export ban and slowing investment, posing a challenge for the president-elect, Joko Widodo.

Analysts forecast that the slowdown would continue this year, with growth in Southeast Asia's largest economy likely to fall short of last year's expansion, but not disastrously so.

"GDP growth is slowing but not crashing. And personal consumption growth remains robust," DBS economist Gundy Cahyadi said Tuesday.

Mr. Widodo, the governor of Jakarta, is set to take office in October barring a successful court challenge from his rival, Prabowo Subianto. During the campaign, Mr. Widodo vowed to overhaul an economy hurt in recent years by a commodities downturn. The country has been straining to reverse the trend by building up manufacturing in sectors such as automotive.

"Businesses now see politics is stable" following the election, said Andrew Nasuri, chief executive of Garuda Mataram Motor, which sells Volkswagen automobiles in Indonesia. However, the new government's full impact might not be felt until next year, Mr. Nasuri added.

The mining sector continued to contract in the latest period, falling 0.15% from a year earlier following the export ban. The sector is likely to rebound, however, after the government's recent agreement to allow Freeport-McMoRan Inc., the biggest copper producer in Indonesia, to resume exports, said Credit Suisse economist Santitarn Sathirathai.

He forecasts overall GDP growth of 5% this year, compared with last year's 5.8% expansion.

In the second quarter, Indonesia's economy expanded a seasonally unadjusted 5.12% in the second quarter from a year earlier, compared with 5.22% growth in the January-March period, the official Central Statistics Agency said Tuesday. This marked the slowest growth since the third quarter of 2009, when GDP expanded 4.27%. Private consumption, the economy's backbone, grew 5.59%, similar to the previous quarter's 5.61% gain.

Some economists offered a brighter look at the economy. The quarter-on-quarter seasonally adjusted annualized rate of GDP growth was 5.1%, compared with a 3.5% pace in the previous quarter, according to Barclays.

Despite many economists' expectations for a continued GDP slowdown, they said Bank Indonesia was unlikely to cut interest rates, citing the central bank's commitment to keeping the current-account deficit in check.

Bank Indonesia last year raised interest rates by 1.75 percentage points to 7.50%, a level unseen since early 2009, to help narrow the country's current-account deficit from an all-time high of 4.5% of GDP. Economists said, however, that monetary policy can give only limited support, urging the government to "bite the bullet" by slashing energy subsidies.

Linda Silaen and I Made Sentana contributed to this article.

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