Insider Stories - Indonesia’s economy expanded at its slowest pace in nearly four years in the third quarter, as depreciating rupiah dragged domestic consumption, while exports remains weak, the Central Statistics Bureau (BPS) data showed on Thursday.

Gross domestic product of Southeast Asia's largest economy grew by 5.62 percent in the third quarter of this year from a year ago period. The pace was slower than the second quarter's 5.8 percent and the slowest since the fourth quarter of 2009, when the economy grew 5.60 percent.

On a quarter-on-quarter basis, GDP rose 2.96 percent compared with forecast for a 3.01 percent rise. In the year through September, GDP grew 5.83 percent compared with the same period in 2012.

"The main driver of the slowdown in the quarter was net exports; in the context of reducing external imbalances, we think the focal point of analysis should be more on the domestic demand side," said Helmi Arman, Citibank Indonesia economist in a note to clients on Thursday.

"The third quarter 2013 GDP data show that consumption and investment growth were relatively resilient. Although the latter two datapoints are backward-looking, they provide a gauge of the strength of domestic demand in the short period after the foreign exchange depreciation and policy rate (and commercial bank rate) hikes."

BPS data showed that household consumption growth accelerated to 5.5 percent year-on-year from 5.2 percent in the second quarter.

Helmi said "This is a surprise, as the jump in inflation after the June fuel price hikes should have eroded purchasing power."

He observed that consumption growth accelerated in both foods and non-foods.

Meanwhile, the government spending grew 8.83 percent and gross fixed capital formation (fixed investment) increased 4.51 percent.

Indonesian consumers saw annual inflation in October slowed to 8.3 percent from 8.4 percent a month earlier, as the impact of the fuel price increase deceased.

Inflation reached its peak this year in August when it hit 8.8 percent after the subsidized fuel price was hiked.

"High inflation and recent interest rate hikes will weigh on growth over the next year," Capital Economics said. "The outlook for investment growth, which has now slowed for 5 consecutive quarters, is also subdued."

The central bank has raised its key policy rate by a cumulative 150 basis points since June this year in an attempt to combat in inflation and stabilize the rupiah exchange rate.

In September, Bank Indonesia forecast the economy to expand around 5.5-5.9 percent this year.

Deputy to the Finance Minister Bambang Brodjonegoro estimated a 5.8 percent growth this year and in the fourth quarter alone, it can grow 5.8 percent year-on-year.

Market Impact

The growth data was responded positively by the stock market as the figure is in line with analysts expectation. A polling by Reuters estimated the third quarter growth at 5.6 percent.

The rupiah, however, remained depreciating on Wednesday.

The Indonesian benchmark stock index advanced on Wednesday amid the release of better-than-expectation gross domestic product data. The benchmark Jakarta Composite Index fell 0.6 percent to 4,449.76 on Wednesday closing. Investors traded more than 3.5 billion shares worth Rp 4.9 trillion, with stocks gaining beating decliners 130 by 121.

The rupiah, according to Bank Indonesia data, depreciated to Rp 11,414 on Wednesday against the dollar. The world's fourth most populous nation is running large current account deficit, which sank the value of its rupiah.

Forex Reserves Improve

Also on Wednesday, data from Bank Indonesia showed taht as of the end of October, the country’s foreign exchange reserves rose by $1.3 billion to $97 billion in October.
The reserves were enough to finance up to 5.5 months of imports of the country.