Indonesia grows at best pace since 2013 in 2Q, though headwinds loom

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JAKARTA (Aug 6): Indonesia's economy beat forecasts and grew the fastest in 4½ years in April-June, helped by higher consumption during the Muslim fasting month, but external headwinds cloud the outlook for lifting growth well above 5%.

Southeast Asia's largest economy grew 5.27% from a year earlier in the second quarter, data from the statistics bureau showed on Monday.

This topped the first quarter's 5.06% and a Reuters poll projection of 5.16%, while giving Indonesia its best quarter since October-December 2013.

The latest number is the best since President Joko Widodo became president in 2014, and may give him a little boost as he seeks re-election for another five-year term in 2019.

But there are plenty of factors that make it unlikely Indonesia can keep seeing higher growth rates, starting with higher US interest rates — which have battered the rupiah currency — and possible collateral damage from the US-China trade war, which can hit Jakarta's commodity exports.

While the April-June number was impressive, "the government will still need to embark on a Mission: Impossible-like stunt" to reach its target of full-year 5.4% growth, said Satria Sambijantoro, economist at Bahana Sekuritas.

Household consumption, which accounts for more than half of Indonesia's gross domestic product, grew 5.14 in the second quarter from a year earlier. The Muslim fasting month of Ramadan and the Eid al-Fitr celebration, traditionally Indonesia's peak consumption period, occurred in May-June this year.

DAMPENING OF DEMAND

However, higher interest rates may dampen demand in the following quarters. Since mid-May, Bank Indonesia raised interest rates by 100 basis points to support the rupiah, and it might not be done hiking.

Meanwhile, the government is reviewing capital goods imports and infrastructure projects to narrow the current account deficit. Investment is Indonesia's second growth engine.

Investment growth slowed to 5.87% in the second quarter after posting over 7% growth rate in the previous three quarters

Capital Economics said it doubts Indonesia can maintain the second quarter's expansion pace.

"On the plus side, rapid wage growth should help support consumption. But this is likely to be overshadowed by headwinds elsewhere. Weaker global demand and lower prices for its main commodity exports (coal and palm oil) mean export revenues are likely to remain low by past standards," it said.

Also, in its view, infrastructure spending has to slow if the government is to keep the budget deficit within the 3% of GDP mandatory limit.