Indonesia’s Growth to Stagnate: IMF, Fitch

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Tags: fitch, IMF

The

government is working on a regulation that will allow foreign ownership

of properties. Developers cheer with the new policy which is expected

to boost property sector amid Indonesia's economic slowdown. (Antara

Photo/Vitalis Yogi Trisna)

Jakarta.

Indonesia’s economic growth is likely to stagnate this year, warned the

International Monetary Fund and global debt rating agency Fitch Ratings

on Thursday.



The economy faces headwinds stemming from weaker regional growth,

tightening global financial conditions, a weakened rupiah and narrow

fiscal room — all while the government is left with limited options to

stem the tide.



Indonesia’s gross domestic product expanded by 4.7 percent in the

January to March period — its worst performance since 2009 — due to

sluggish government spending and lower mining output. The country

expanded 5 percent in 2014.



“My preliminary estimate is that, as a result of the weaker first

quarter growth, Indonesia’s growth for the year will be somewhat lower

from 5.2 [percent] to around 5 [percent],” said Kalpana Kochhar, IMF

deputy director for the Asia and Pacific region.





IMF maintained a growth estimate of 5.2 percent for this year, and

5.5 percent for next in the “Asia and Pacific Regional Economic Outlook”

report published Thursday.



Kalpana, however, noted that the report had not included the first quarter figures.



“Weaker-than-expected growth in China and Japan would have

potentially sizeable spill-overs to the rest of the region,” said

Kochhar.





China and Japan are among the biggest importers of Indonesian

commodities and merchandise, buying a total of a fifth of Indonesia’s

$33 billion non-oil and gas outbound shipments in the first quarter.





“Tightening global financial conditions and disruptive currency

movements, possibly associated with asynchronous monetary policies in

major advanced economies, could affect financial stability.





“This is particularly the case where leverage and foreign-exchange-denominated corporate debt is high,” Kochhar said.



Indonesia’s private sector external debt in February expanded 14

percent from the same month a year ago to $164.1 billion, accounting for

more than a half of the country’s total external debt, data from Bank

Indonesia, the central bank showed.



Indonesia has limited fiscal or monetary policy options to boost

growth as the country needs to cope with lower-than-targeted government

revenues and risks macro instability with further monetary loosening,

Fitch Ratings said in a statement on Thursday.



“Lower-than-expected [first quarter] economic growth suggests

full-year real GDP growth is likely to be closer to 5 percent, not 5.5

percent as we originally forecast,” the Fitch statement said.



“There is some room left for Indonesia to increase fiscal spending on

infrastructure while remaining within the 3 percent of GDP fiscal rule,

but that would be limited as low commodity prices reduce government

revenue,” Fitch said.



Tax revenue collection fell short of the government’s target for the

first four months of 2015, as weak oil prices and lower retail receipts

signal an economic slowdown which may have stretched into the second

quarter.





The government received Rp 310 trillion ($23 billion) from January to

April, or 24 percent of its target for the full year, the Finance

Ministry’s tax office said in a statement on its website on Wednesday.



That was 1.3 percent lower than the same period last year.



“Fiscal policy loosening, while still abiding to that fiscal rule,

would not have a negative impact on Indonesia’s rating profile.



“At the same time, questions remain over the government’s capacity

and ability to spend the already planned [capital expenditure], let

alone above the current target,” the ratings agency said.



Indonesia should prioritize economic stability over higher real GDP

growth to maintaining its investment grade rating, which has helped

attract investment to the country, the rating agency said.





Fitch and Moody’s Investors Services upgraded Indonesian debt to

investment grade three years ago, while Standard and Poor’s maintain the

debt’s junk status.



Bank Indonesia’s tight monetary policy has helped stave off the

effects of the US Federal Reserve’s tapering, but further monetary

easing risks higher inflation and further weakening of the rupiah.



“Indonesia remains more vulnerable to external-account

destabilization than some regional peers such as India and the

Philippines; notably, its current account has not narrowed significantly

and remains at close to 3 percent of GDP,” Fitch said.



Still, Vice President Jusuf Kalla on Thursday predicted that

Indonesia’s economy would rebound to grow at more than 5 percent in the

second quarter on the back of increased infrastructure spending.



“The projects will happen in the second quarter. As the projects

start, cement prices will go up, and people will have more jobs,” he

told reporters at the sidelines of the 2015 Institute International

Finance Summit event in Jakarta.



“It will take time to reach [the growth target], but there will be government and public spending,” he said.

GlobeAsia with additional reporting from Reuters