Asia News Network, Jakarta – Indonesia's economy is once again at a crossroads as it enters the second half of the year. Can it sustain the growth it enjoyed in the first two quarters, or will it experience a slowdown due to recent unfavorable circumstances?
On one hand, consumption is still expected to grow the rest of the year and maintain its function as the main economic driving force. Investment and exports are also expected to grow on the back of a better infrastructure and investment climate, contributing more to the country's gross domestic product (GDP).
On the other hand, the recent global oil prices at US$61 per barrel and the weakening rupiah against the US dollar can push up the inflation rate, thus hurting consumers' purchasing power.
The central bank's decision to maintain its tight monetary policy by increasing its benchmark interest rate to curb the rising inflation could further hurt consumer spending, as banks will tend to raise their interest rates as well, making commercial and consumer loans more costly.
Indonesia's economy grew by 6.35 percent on an annual basis in the first quarter, down from the 6.65 percent GDP growth in last year's final quarter.
Official data on the country's economic growth in the second quarter this year is not yet available, but the preliminary assessment of central bank, Bank Indonesia (BI), was that it stood at between 5.5 percent and 6 percent. BI expects growth to reach 5.9% by the end of the year, while the government hopes to see a GDP growth of 6 percent.
A consumer survey by BI last month, surveying 4,300 households, revealed that consumers still have a positive outlook on the economy. Most of them see their income possibly rising, or at least remaining at the same level, over the next six months.
This indicates that consumer spending should remain strong, or even rise, in the third quarter.
The trend in robust consumption is reflected inassessment of the country's banking industry which showed that consumer loans in May – including car and house loans as well as credit card transactions – increased by 38.42 percent from the same period last year.
In comparison, bank loans for investment and corporate capital expansion only grew by 17.46 percent and 29.84 percent respectively in the same period. BI data shows that bank loans reached a total of Rp 560.8 trillion ($57.3 billion) as of February, of which more than a quarter were consumer loans.
The rising trend in consumer loans is expected to continue in the third quarter, as most banks still consider such loans promising in terms of generating revenue in the short term.
The consumer survey, however, also revealed that most consumers still see inflation and interest rates set to rise in the future, prompting them to put on hold their plans to purchase durable goods – houses, furniture and vehicles – until next year.
These factors could in the end also weaken consumption in the third quarter.
Indonesia's on-year inflation had shot up to 8.81 percent in March following a fuel price hike, although it started to ease. Inflation began picking up again to 7.42 percent in June, or 4.28 percent throughout the year's first semester. The government is expecting an on-year inflation rate of 7.5 percent.
Credit interest rates during the second quarter, meanwhile, are estimated to have reached between 6.28 percent and 11.75 percent for rupiah-denominated loans, and between 0.94 percent and 4.51 percent for loans in foreign currencies.
Both figures show a rise in interest rates from the first quarter, which stood at between 6.16 percent and 11.47 percent for rupiah loans and between 0.84 percent and 4.21 percent for loans in foreign currencies.
Deposit interest rates, meanwhile, stand between 5.04 percent and 7.65 percent for rupiah savings, and 0.61 percent to 2.61 percent for foreign currency savings.
The rising inflation rate has prompted BI to continue raising its benchmark interest rate to 8.5 percent, which will stand throughout the third quarter.