Coordinating Minister for Economic Affairs (CMEA) Darmin Nasution believed that Indonesian economy can grow 5.2 percent in the second quarter (2Q) of 2019 - Photo by CMEA Office

JAKARTA (TheInsiderStories) – Coordinating Minister for Economic Affairs (CMEA) Darmin Nasution believed that Indonesian economy can grow 5.2 percent in the second quarter (2Q) of 2019. This, he stated, based on solid macroeconomic management, strong domestic demand and the momentum of growth that has taken place in the current administration of President Joko Widodo.

The minister also noted, the increase in ratings from the Standard & Poors rating agency and the increase in the competitive index from the International Institute for Management Development, might add to the positive list that makes Indonesia more attractive and feasible as an investment country.

In terms of demand, Indonesia’ economic growth began to be sustained by the four growth engines such as consumption, investment, exports and government spending, he opined. Nasution noted, over the past three years, Indonesian inflation has been maintained at around 3.5 percent, lower than the inflation rate over the past ten years of 5.6 percent.

Investment also gradually began to recover, supported by the health of the financial sector (banking and capital markets), the implementation of infrastructure development programs, and the increasing competitiveness of Indonesia’s business and investment climate.

He said, the improvement of the investment climate through simplification of business licensing (OSS System), is believed will support investors confidence. Therefore, the government believes that several sectors such as transportation and energy will be in demand by investors.

However, Nasution revealed, the government does not turn a blind eye to the development of the global economy which is looking for a new balance point. For this reason, he stated, the government will take responsive steps to face the risk of continuing external pressure.

In dealing with these risks, the current direction of government policy will be more focused on the strategy to maintain the stability and strengthening the fundamentals of the domestic economy. The domestic demand is also believed to remain strong in the short term followed the increased of employment in the formal sector and the expansion of government social assistance programs.

On the other hand, the government will also focus on opening new export markets in Non-Traditional Market countries, such as in Africa, South Asia, the Middle East and Latin America.

In the 1Q of 2019, the country’ economy grew 5.07 percent in the 1Q of 2019, from 5.06 in the same period of the previous year. The economy in three months of this year the economy shrank to 0.52 percent, following a contraction of 1.69 percent in Q4 of 2018, Statistic Indonesia reported on May 6.

According to the agency’ head Suhariyanto, this is the weakest growth rate since the 1Q of 2018, as private consumption and investment continued to rise more gently, while government spending continued to increase and net exports contributed negatively to growth domestic products (GDP).

He also reported that the Indonesian economy is based on the GDP magnitude on the basis of current prices in 1Q of 2019 reaching Rp3,782 trillion (US$266.34 billion) and on the basis of constant 2010 prices reaching Rp2,625 trillion.

The declining of Indonesia’ economic growth simultaneously with the estimate of Institute of Chartered Accountants in England and Wales (ICAEW), that expected Indonesia’ GDP slower to 5.0 percent in 2019, from 5.2 percent in 2018, amid the slowdown in net export growth.

According to ICAEW analysis, the declined was also due to reducing of export growth as trade protection became tighter and demand Chinese imports weakened. Also, it was driven by weak global economic activity at the end of 2018 and declining exports, where only Malaysia recorded by positive growth.

“Looking ahead, we expect the risks to the region to be primarily on the downside. A sharper slowdown in Chinese economic growth triggered by worsening confidence, or a renewed escalation in US-China trade tensions, both affect global trade and growth across the region,” said ICAEW Economic Advisor & Oxford Economics Lead Asia’s economist Sian Fenner.

He stated, domestic demand remained the critical engine of growth in this quarter as expected, although the data was mixed. GDP growth rose in 4Q of 2018 to 5.2 percent year-on-year, unchanged from the previous quarter and bringing full-year growth to 5.2 percent, up slightly from 5.1 percent in 2017.

Meanwhile, consumer spending picked-up slightly, growing 5.1 percent year-on-year, helped by mild inflation and a healthy labor market.

He viewed in the future modestly higher inflation and lower planned increases in minimum wages compared to last year are likely to dampen real household income growth and consumption growth, offsetting the impact of pre-election giveaways in the 2018 Budget.

The potential for a worsening report on the financial position of state-owned enterprises (SOEs), uncertainty in the profitability of several infrastructure projects, and a more significant current account deficit are challenges the economic prospects, according to ICAEW analyst.

On the other side, Bank Indonesia (BI) will maintain a strict monetary policy stance. The Rupiah against the US dollar fell 10 percent in 1Q of 2018 and the end of October 2018, due to pressure from many foreign exchange markets.

The central bank is trying to reduce the width current account deficit and support the strengthening of the Rupiah and limit Indonesia’s external imbalances, with a 175  basis points increase from the interest rate increase since May.

With expectations that the Federal Reserves will continue to tighten United States monetary policy at the end of this year, foreign ownership of Indonesian bonds (almost 40 percent) could cause the Rupiah to become vulnerable to changes in investor sentiment.

BI’ policy level is likely to rise throughout the year, said economist, albeit at a slower pace than in 2018. Overall, BI is expected to raise interest rates once this year by 25 basis points in 3Q.

Furthermore, Suhariyanto said, in terms of production, the highest growth was achieved by the Corporate Services Business Field of 10.36 percent, while in terms of expenditure was achieved by the Components of Consumption Expenditures of Non-Profit Institutions that Serve Households which grew 16.93 percent.

by Linda Silaen, Email: linda.silaen@theinsiderstories.com