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Indonesia posts fastest economic growth in over a year, outlook uncertain

Published 11/06/2022, 11:16 PM
Updated 11/07/2022, 06:56 AM
© Reuters. FILE PHOTO: People wearing protective masks walk on a pedestrian bridge amid the spread of the Omicron variant of the coronavirus disease (COVID-19) in Jakarta, Indonesia, January 10, 2022. REUTERS/Willy Kurniawan

By Gayatri Suroyo and Stefanno Sulaiman

JAKARTA (Reuters) -Indonesia's economy expanded at its fastest pace in more than a year in the third quarter, underpinned by improved investment and government spending, but economists warned of tougher times ahead.

Southeast Asia's largest economy grew 5.72% year-on-year, according to data from Statistics Indonesia. That was up from a 5.44% pace in the second quarter but below the 5.89% expansion forecast in a Reuters poll of economists.

Unadjusted for seasonal factors, gross domestic product (GDP) rose 1.81% from the previous three months, above the 1.62% increase forecast in the poll.

Investment grew at its fastest pace in more than a year, private consumption remained robust, government spending shrank more slowly and exports rose in the double-digits, even as their net contribution to GDP fell as imports also increased.

"Economic growth in Indonesia accelerated in the third quarter, but this is likely to be as good as it gets," Gareth Leather, senior Asia economist at Capital Economics, said.

"We expect lower commodity prices, tighter monetary policy and elevated inflation to drag on growth over the coming quarters."

While Indonesia's economy has seen an export boom this year, analysts expect a bleaker outlook as tightening monetary policy and rising inflation globally risk derailing the world economy.

At home, Bank Indonesia has raised interest rates by a total of 125 basis points since August to contain inflation, which hit a seven-year high in September after the government raised subsidised fuel prices that month.

Highlighting the risks, the country's chief economic affairs minister, Airlangga Hartarto, said demand for some exports such as textile and furniture products has already slowed, while commodity shipments could be affected by moderating prices.

However, calling the third-quarter figure "impressive", Airlangga said 2022 GDP growth is set to reach the government's 5.2% target and that resilient domestic demand should cushion the economy from the impact of a slowdown in exports.

Growth accelerated in the manufacturing, transport, warehousing and hospitality industries, the data also showed.

MORE RATE HIKES EXPECTED

Investment expanded 4.96% annually in the third quarter - at its fastest pace in over a year - while government spending shrank 2.9%, slowing from a 5.2% contraction in the previous quarter, the data showed.

Private consumption, which accounts for over half of GDP, expanded 5.4%, underpinned by increased spending by middle and upper income groups, and little changed from 5.5% growth in the second quarter.

Exports expanded nearly 22% year-on-year in the third quarter, picking up pace from growth of just under 20% in the April-June quarter. Indonesia expects to post the country's largest ever export earnings in 2022 as the resources-rich country has benefited from rising commodity prices.

DBS Bank economist Radhika Rao said the GDP data reinforced the case for BI rate hikes, forecasting 75 basis points worth of rate hikes still in the current tightening cycle.

© Reuters. FILE PHOTO: People wearing protective masks walk on a pedestrian bridge amid the spread of the Omicron variant of the coronavirus disease (COVID-19) in Jakarta, Indonesia, January 10, 2022. REUTERS/Willy Kurniawan

"A comfortable growth backdrop provides the central bank the headroom to focus on inflationary expectations and keep currency underperformance in check through further rate hikes," Rao said.

The rupiah has fallen 9% against the U.S. dollar this year, buoyed by the Federal Reserve's aggressive monetary tightening.

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