Last updated: February 6, 2012 12:56 pm

Indonesia GDP hits 6.5% in fourth quarter

Indonesia’s economy shrugged off faltering export growth to record a 6.5 per cent rise in fourth-quarter GDP, a level last seen before the 1990s Asian financial crisis.

The better than expected figures were due largely to continued investment and booming domestic consumption.

Full-year growth was also 6.5 per cent, the strongest performance since 1996.

The figures, said Leif Eskesen, an economist with HSBC, shows that Indonesia’s “domestically oriented economy humming quite nicely to its own tune”.

Domestic consumption and investment has enabled Indonesia to grow faster than its neighbours, such as Singapore, whose economies are more dependent on global trade flows and therefore more vulnerable to slowing export demand.

“Exports certainly will be hit by the global downturn, but our domestic market remained robust,” said Suryamin, head of Indonesia's statistics bureau.

Quarter on quarter, the economy contracted 1.3 per cent, in part because exports grew about 8 per cent in the fourth quarter, down from nearly 18 per cent growth previously. Part of that slowdown was due to easing of prices of commodities such as palm oil, of which Indonesia is a big producer.

Tai Hui, head of market research for southeast Asia at Standard Chartered, said he anticipated growth in Indonesia would moderate only slightly to 5.8 per cent for this year.

Mr Hui said that slowing exports would pinch headline growth, while investment and consumption would probably not continue growing fast enough to offset weak exports.

Nevertheless, said Mr Hui, the resilience of the local market means business confidence in Indonesia remains “incredibly strong”, far above the rest of southeast Asia.

But the fourth quarter's strong GDP figures also add to concerns that inflation could rise, particularly if the central bank – which has sounded noticeably dovish in recent statements – decides to cut rates at its monthly meeting on Thursday.

Inflation expectations are near three-year highs, according to RBS analysts. Although official inflation rates have fallen recently, most economists say that is partially because food prices spiked in 2010, meaning current inflation is being compared to a particularly high base.

The central bank last cut interest rates in November to 6 per cent, a record low. It then took the market by surprise in late January when it cut the rate it pays banks for depositing funds with the central bank, a move that would likely encourage banks to lend more into the market, explained Su Sian Lim, an economist at RBS.

The Jakarta Composite Index closed down just over 1 per cent.

Additional reporting by Taufan Hidayat in Jakarta.

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