Indonesia growth eases to 6.3%

Foreign investment increase balances fall in exports

Indonesia’s growth slowed moderately last quarter, but economists remained positive that consumption and foreign investment would keep the country’s economy stable despite weaker overseas demand.

The economy expanded 6.3 per cent in the first quarter of 2012, down from 6.5 per cent growth in the previous three-month period but in line with most forecasts. The slight drop in growth represents the first slowdown in a year.

Indonesia, with population of 240m, has long been buoyed by domestic consumption. The country is among the Asian nations least reliant on exports and thus is less exposed than nations such as Singapore to falling demand from Europe.

Economists do caution, however, that a slowdown in China, a significant consumer of Indonesia’s commodities, remains a potential risk.

Consumption and growing foreign direct investment, which jumped 30 per cent in the first quarter, buoyed the economy, despite a fall in exports. Export growth slowed to 7.8 per cent. In the third quarter of last year, they had been growing at 17.8 per cent.

Overall investment increased 9.9 per cent, down from 11.5 per cent in the previous quarter, according to the country’s statistics bureau.

“We’ve seen a much sharper slowdown in countries like India and China,” said Aninda Mitra, Asia economist with ANZ in Singapore. “The overall growth story still has some firm legs to run on for the rest of the year.”

That growth has bolstered the job market. Unemployment fell to 6.3 per cent compared with 6.8 per cent a year ago.

Economists expect the country’s central bank to leave the benchmark interest rate unchanged at a record low of 5.75 per cent when it meets on Thursday.

Inflation is beginning to cause some concern, however, according to Leif Eskesen, an economist with HSBC. Consumer inflation last month edged up to 4.5 per cent, the highest since last September.

“Eventually the expected pick-up in inflation will persuade the [central bank] to tighten monetary policy,” wrote Mr Eskesen.

Inflation has proved a problem for Indonesia’s markets in the recent past. In January, similar concerns that the central bank was too dovish led to a slide in equities as inflation veered towards 7 per cent. Inflation could again climb that high, according to economists including HSBC and Capital Economics.

The government is discussing plans to cut fuel subsidies, which could cause prices to rise by about a third.

The country also reported strong growth in its foreign exchange reserves, to $116.4bn at the end of April from $110.5bn at the end of March.

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