Indonesia’s economic growth surprisingly picked up in the second quarter of this year, fuelled by easy credit and strong domestic demand, signalling Southeast Asia remains resilient to the global slowdown.
Most economists expect the central bank to keep interest rates on hold at a record low into next year to drive growth, although some analysts caution that tighter policy might be needed beyond that to dampen domestic demand, which has pushed the trade account into deficit and undermined the rupiah.
Indonesia’s economy is growing faster than all the BRICS nations bar China, making it for some analysts a worthy contender to join the grouping, which also includes Brazil, Russia, India, and South Africa.
The country’s statistics bureau said gross domestic product growth last quarter was 6.4 per cent from a year earlier against 6.3 per cent in the first quarter, helped by domestic consumption and investment. GDP grew by 2.8 per cent on a quarterly basis, although the figures are not seasonally adjusted.
“The strong Q2 growth provides a cushion against the risk of further growth setbacks in the rest of the year,” said Aninda Mitra, an economist at ANZ Bank in Singapore.
“But we still think policymakers will need to tighten policies to ensure that the strong growth does not destabilise the external financing gap, which could be rupiah negative and ultimately not good for inflation either.”
Economists had forecast that annual growth in Southeast Asia’s largest economy would ease to 6.1 per cent, citing shrinking exports.
Financial markets provided little reaction to the data, which showed that buoyant domestic demand, especially in transport, hotels and government consumption, kept growth on an even keel. Thailand and Malaysia are also expected to post a pick up in economic activity in the second quarter versus the first quarter, analysts have said.
Investors are pouring into Southeast Asian stock markets, with bourses in Manila, Ho Chi Minh, Bangkok and Singapore all seeing double-digit rises this year. Investors are betting on long-term growth -IHS Global Insight forecasts the region’s GDP will overtake Japan by 2028.
As demand from China and Europe fell in recent months, Indonesia has had consecutive trade deficits between April and June, weighing on the rupiah. The April deficit was the first since mid 2008, barring a small shortfall in July 2010, Thomson Reuters data shows.
The currency, which has fallen 4.4 per cent against the dollar this year, is the second-worst performer among emerging Asian currencies.
A burgeoning appetite for imports, from wheat for fast food to iPads and luxury cars, in a country that mostly exports raw commodities such as coal and crude palm oil, created a $1.3 billion trade deficit in June -a deficit economists see continuing to the end of 2012 to keep pressure on the rupiah.
Expectations for slower growth meant some economists had started to call for rate cuts this year. But most now see rates on hold into 2013 as Bank Indonesia will want to support annual growth towards President Susilo Bambang Yudhoyono’s target of 7 per cent by the time of national elections in 2014. The central bank next meets on Thursday to review policy.
“The central’s bank underlying growth bias means that tightening in the near-term is unlikely, especially given external headwinds,” said Prakriti Sofat, economist at Barclays Capital, expecting flat rates into the first half of 2013.