Indonesia's Strong Growth May be at Risk

Recent updates for Indonesia sent mixed signals. Despite strong expansion in 2012, declining exports and widening current account deficit are likely to have an impact on the performance of the country in the short run.
Joana Taborda | 5/2/2013 11:03:02 AM

Indeed, in the fourth quarter of 2012, the GDP rose 6.10 percent, boosted by private consumption. In addition, in the last three months of 2012, industrial production grew an average 16 percent a month, supported by high levels of investment as foreign and domestic companies were trying to meet surging demand from the rapidly expanding middle class. In fact, in February, retail sales recovered and expanded by 13.9 percent from a year earlier. On the negative side, in April, inflation rate was reported at 5.6 percent, well above the central bank target range, and mainly due to a rise in food prices. To make things even worse, despite the rupiah depreciation, depressed global demand and lower prices of commodities still weight on exports, which in February dropped for the third month in a row. More importantly, in 2012, due to surge in imports and drop in shipments, current account deficit reached 24.18 billion USD compared with a surplus of 1.7 billion USD in 2011, raising concerns among investors about the sustainability of high growth rates. 

In the fourth quarter of 2012, the GDP expanded 6.1 percent year-on-year, the slowest expansion in more than 2 years. In March, exports declined for the fourth month in a row, and reached 15 billion USD, 13 percent lower than in the corresponding period last year.

In March, Indonesia posted the first trade surplus in 6 months, mainly due to a drop in imports. In fact, in the last two years, imports have been steady rising as strong growth rates support consumption. 


Consumer spending has been one of the main drivers of the economy, and grew 5.36 percent in the fourth quarter of 2012 from a year earlier. Retail sales which have been on a downward trend since August of 2012, slightly recovered in February, expanding by 13.9 percent. 
In the last 12 months, Indonesian rupiah has depreciated 5.9 percent against the U.S. dollar supported by surging current account deficit.