Indonesia's economy expanded in the third quarter at the slowest pace in a year as rising fuel costs, higher inflation and interest rates curbed consumer spending.

Southeast Asia's largest economy grew 5.3 percent in the three months to Sept. 30 from a year earlier after gaining a revised 5.8 percent in the previous quarter, Slamet Sutomo, a deputy head at the Central Statistics Bureau said at a briefing in Jakarta today. That was more than the median forecast of a 5.1 percent expansion in a Bloomberg survey of 12 economists.

Higher global oil prices and a slump in the rupiah this year forced President Susilo Bambang Yudhoyono's government to increase fuel costs and the central bank to raise interest rates. The double blow has curbed purchases of motorcycles and cars in a nation where 126 million people live on under $2 a day.

"For the next couple of quarters it's going to be tough," Raymond Gin, who helps manage about $102 million at PT Manulife Aset Manajemen Indonesia in Jakarta, said before the announcement. "High interest rates and fuel costs will reduce purchasing power and that will naturally slow growth."

Indonesia's central bank has raised its benchmark interest rate five times since July, with a record 1 1/4 percentage point increase on Nov. 1 aimed at curbing inflation and bolstering the currency taking the key rate used as a reference for bill sales to 12.25 percent.

Fuel Prices Further rate increases could damp future growth in Indonesia's $258 billion economy, Homi Kharas, chief economist at the Washington-based World Bank, said in an interview before today's release.

"This is an economic cycle which is just starting to build," said Kharas. "One wants to make sure that it continues to build and not to be too far ahead of the curve in monetary policy if at the same time fiscal policy is also tightening."

Bank Indonesia was forced to raise rates after President Yudhoyono increased fuel prices by an average 29 percent in March to help prevent subsidies from widening the budget deficit. Kerosene prices almost tripled and diesel tariffs more than doubled on Oct. 1 to cap the government's fuel subsidies this year at 89.2 trillion rupiah ($8.7 billion). Bank Indonesia, the nation's central bank, will try to avoid a "substantial" interest rate increase, even with inflationary pressure, because it doesn't want to hurt economic growth, Governor Burhanuddin Abdullah said in Jakarta today.

"Going forward BI will try to take steps so that a substantial rise in the benchmark BI rate can be avoided to maintain the momentum of the economy," Abdullah told reporters.

Interest rates

Rising interest rates will reduce earnings at lenders, bankers said. "Most Indonesian banks will see a decline in profit this year and through the first half of next year," said Chairul Tanjung, chairman of PT Bank Mega, a mid-size lender. "Rising interest rates may prompt non-performing loans to increase this year."

Car sales in Indonesia fell 20 percent to 35,103 units in October from 44,044 the previous month after declining 13 percent in September, according to figures from PT Toyota-Astra Motor, the local unit of Toyota Motor Corp., the world's third-largest automaker, which are compiled from data from the Association of Indonesian Automotive Industries. Motorcycle sales fell to 452,876 units in September from 504,787 units in August.

"A slowing economy will have an impact on telephone traffic," said Muhammad Awaluddin, a spokesman at Telekomunikasi in Jakarta. "There is a possibility customers may use more of the cheaper text messages to communicate."

Consumer Spending Manufacturing expanded 5.6 percent in the third quarter from a year earlier, according to today's report. Farm output rose 1.6 percent during the same period, whilst Indonesia's mining industry declined 2.3 percent.

Government spending increased 16.2 percent in the three months ended September from a year ago. Investment grew 9.2 percent and household consumption rose 4.4 percent.

"It's possible that people spent more in anticipation of further price increases," said Winang Budoyo, an economist with PT Mandiri Sekuritas in Jakarta. "Spending will most likely slow down in the next quarters, while other components, such as investment and exports have slowed quite a bit and they may not pick up in the short term."

Inflation

Indonesia's inflation rate, which reached a 26-month high of 8.8 percent in March after the government raised fuel prices, jumped to 17.9 percent in October following that month's subsequent increase in energy costs.

Inflation may average 17 percent this year, Indonesia's top economics Minister Aburizal Bakrie said on Nov. 1. The central bank on Oct. 24 raised its 2005 inflation forecast to 14 percent from its original estimate of 12 percent.

Higher oil prices have threatened to widen Indonesia's budget deficit – forecast at 24.9 trillion rupiah or 0.9 percent of gross domestic product this year, as they make fuel subsidies more expensive. Crude oil prices, which have dropped about 19 percent since reaching a record $70.85 a barrel on Aug. 30, are 22 percent higher than a year ago.

The rupiah, which plunged to a four-year low of 10,840 against the US dollar on Aug. 30, has dropped 7.9 percent this year, making it the second-worst performing of 15 Asia-Pacific currencies tracked by Bloomberg. The rupiah rose 0.1 percent to 10,066 against the US dollar at 3:26 p.m. in Jakarta.

Indonesia's economy may expand about 5.5 percent this year, lower than the government's official forecast of 6 percent, Planning Minister Sri Mulyani Indrawati said last week. The government expects 6.2 percent growth next year.

President Yudhoyono's government wants to spend $150 billion over the next five years to build the roads, power plants and other infrastructure projects needed to spur growth and create jobs. The government wants to revive foreign investment that fell to $10.3 billion in 2004, about a third of the amount it received in 1995 before the Asian financial crisis.