Tassia Sipahutar and Linda Yulisman, Jakarta – Declining consumer spending and lower investment have unexpectedly caused a drag on the country's economic growth, leading to its slowest pace in more than two years.
The Central Statistics Agency (BPS) announced on Monday that gross domestic product (GDP) grew by 6.02 percent in the first quarter compared to the same period last year, its lowest level since September 2010.
While the central bank and the Finance Ministry remain upbeat over this year's growth target of 6.5 percent, the first quarter outcome was below Bank Indonesia's forecast of 6.2 percent.
Domestic consumer spending, the primary growth engine for the economy, grew by 5.17 percent from a year ago, down slightly from 5.38 percent in the fourth quarter last year. "The trend is slowing. What propelled the consumer growth in the first quarter was spending by middle-class consumers on household goods," said BPS chairman Suryamin.
Consumer spending slowed due to food-price inflation during the quarter. "But we do not expect this to be persistent. Even if the government raised the subsidized fuel price, consumption would slow down further but might only last for about two quarters," said Bank Danamon economist Dian Ayu Yustina in a note.
"Furthermore, it should be offset by rising spending in preparation for the general election. Pressure on domestic consumption should also be limited by the better absorption of the labor market."
The slowdown in economic expansion was also exacerbated by lower than expected government spending despite measures already put in place by government officials to help speed it up.
Government spending only grew by 0.42 percent in the first quarter compared to the same period last year. The figure dropped by 42 percent compared to the fourth quarter last year. "There seems to be no end to the slow cycle of government spending in the first quarter," said Suryamin.
In the first quarter this year, the government only disbursed 5.6 percent of the Rp 194 trillion (US$20 billion) of funds allocated for capital expenditure, which comprises spending on assets and infrastructure projects needed to solve distribution bottlenecks, create jobs and propel economic growth, according to the Finance Ministry.
In response to the easing in the rate of growth, acting finance minister Hatta Rajasa said that the government would find new ways to accelerate spending to help spur growth. "We will try to seek ways to accelerate the spending but without compromising principles of good governance," said Hatta.
Failure to end the protracted slow channeling of government funds is partly attributable to the sluggish pace of reform within the government finances and bureaucracy.
Standard & Poor's (S&P) downgraded Indonesia's rating on Thursday to BB+ stable from BB+ positive, because of concerns over the stalling reforms. "Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia's growth potential, thus, delaying poverty reduction and economic development," said S&P.
Aside from weaker household and government spending, the easing in economic growth was also attributable to declining investment expansion. According to the BPS, investment grew 5.9 percent in the first quarter compared to the 9.9 percent recorded during the first quarter of 2012.
"In the past few years, companies invested a lot in machinery and equipment. Now they have limited their investments and are beginning to use what they purchased," Suryamin said. The BPS revealed that investment in plant and equipment was down to 0.17.
"This may be a second-round effect of the drop in commodity prices in 2012. Monthly trade data shows a strong year-on-year drop in dumper truck and heavy equipment imports in the second month of the year. Meanwhile, growth in construction also slowed but was still above 7 percent year-on-year," said Citi economist Helmi Arman in a note.
Investment Coordinating Board (BKPM) chairman Chatib Basri said that he was certain Indonesia could still post strong investment growth.
"In the first quarter, we posted a 30 percent rise in investment realization. I think everything should be okay up until the end of the first half. Capital goods imports will also decline in the fourth quarter," he said.
Trade Minister Gita Wirjawan described the economic outlook for this year as "quite challenging" because foreign direct investment, currently the second key driver of economic growth, was likely to decelerate in the second half of the year.
In addition to this, external trade will be at risk due to continuing weak overseas demand for Indonesian exports. At the same time, the sizeable consumption of oil and gas due to the subsidized fuel policy could boost imports significantly.
However, amid such concerns over trade imbalances, the BPS also announced that net exports unexpectedly improved, growing by 17 percent year-on-year, mostly driven by the sharp drop in the rate of imports.
[Raras Cahyafitri contributed to the story.]