The national flag of Indonesia.

Economic growth in Indonesia has fallen to the lowest level for almost five years, underlining the tough challenges president-elect Joko Widodo will face when he takes office in October.

Gross domestic product grew an annualised 5.1 per cent in the second quarter, according to government data released on Tuesday, as southeast Asia's biggest economy was hit by a ban on the export of unprocessed minerals and by interest rate rises designed to rein in the current account deficit.

That was lower than the 5.2 per cent growth rate recorded in the first quarter and slightly below economists’ forecasts.

Mr Widodo, elected last month after vowing to revamp the economy, is targeting annual GDP growth of 7 per cent in order to boost job creation and reduce poverty. 

However, Indonesia is caught in a bind. Without long-delayed structural reforms to boost foreign investment and exports in an economy driven by domestic consumption, any pump-priming measures are likely to enlarge the current account deficit, which is already worrying investors.

Indonesia's annual GDP growth peaked at 6.5 per cent in 2011, when it was considered one of the world’s hottest emerging markets.

Now investors are more wary of Indonesia because of a growing climate of protectionism and the country's financial fragility.

The World Bank is forecasting a current account deficit of 2.9 per cent of GDP this year, just as investors warn that monetary tightening in the US could drive a further sell-off of emerging markets reliant on foreign funding.

Wijayanto Samirin, managing director of the Paramadina Public Policy Institute and an economic adviser to Mr Widodo, forecast that the economy may only grow by 5 per cent this year and warned that the slowdown would damage employment prospects and efforts to reduce poverty.

He said Mr Widodo's government would have to take corrective action while facing significant budget constraints because of the $21bn fuel subsidy bill. 

“There will not be much room for manoeuvre,” he said. “The next government will need to take unpopular policy decisions to increase revenue and reduce unnecessary expenses. Improving tax collection and reducing the fuel subsidy will be the key factors.”

World, Indonesia GDP, Annual percentage change

Suryamin, head of Indonesia’s statistics agency, said the pace of growth had slowed across the economy and that the export ban and lower commodity prices had caused the mining sector to contract.

The government restricted the export of unprocessed minerals in January as part of a plan to promote the development of a downstream refining industry.

The policy has forced some mining companies, including Freeport-McMoRan, to commit to building expensive processing facilities.

But others, such as Freeport’s US rival Newmont, have argued that the ban breaches their contracts and are taking legal action against the government.

Xavier Jean, an analyst at Standard & Poor’s, said Freeport’s agreement to increase its royalty payments and build a smelter was a short-term victory for the government.

But he questioned whether the policy “makes sense from a long-term standpoint”.

The impasse in the mining sector is only one of many policy problems that Mr Widodo will have to tackle.

Wellian Wiranto, an economist at OCBC, said that with the economy performing “way below potential”, the odds are “stacked against him”.

“He has a lot to prove because expectations are quite high,” he said. “But markets will still give him benefit of doubt if he can make some quick progress, for example by cutting the fuel subsidy.”

Get alerts on Indonesia when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article