Indonesia Economy Grows at Fastest Pace in Six Years

Indonesia’s economy grew at the fastest pace in six years last quarter, extending an expansion that may prompt the central bank to raise interest rates further after its first increase since 2008 to curb price pressures.

 

Gross domestic product rose 6.9 percent in the three months through December from a year earlier, compared with 5.82 percent previously reported for the third quarter, the Central Bureau of Statistics said in Jakarta today. That was higher than the 6.3 percent median estimate of 13 economists surveyed by Bloomberg News. GDP increased 6.1 percent in 2010.

Indonesia joins counterparts from China to Singapore in reporting accelerating growth in the fourth quarter as Asia weathers risks including elevated U.S. unemployment and strives to restrain inflation. Economists from UBS AG and Royal Bank of Canada are among those predicting the nation’s borrowing costs will rise to 8 percent this year, following a quarter percentage-point increase to 6.75 percent last week.

“Inflation clearly outweighs growth risks,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said before the report. “Indonesia’s strong export growth is being supported by surging commodity prices, including on oil and coal prices. We expect growth to remain resilient.”

Bank Indonesia raised its benchmark reference rate on Feb. 4 from a record low. It had previously resisted higher rates to avoid attracting more foreign capital inflows, while opting to increase lenders’ reserve requirements and tightening rules on banks’ foreign-exchange holdings to help curb price gains.

Inflation Risk

The Jakarta Composite Index fell 0.4 percent as of 11:13 a.m. local time. It had slid 8 percent as of Feb. 3 from its Dec. 9 record high on concern the central bank has fallen behind regional peers in boosting rates to cool inflation. The rupiah strengthened for a fifth day to 8,973 per dollar.

Consumer confidence rose in January from December, with a central bank index climbing 4.6 points to 113.9, the highest level since August 2009. Indonesians were more optimistic on the outlook for income, the economy and employment than any time since September 2009, a separate index measuring expectations showed.

The nation’s growth has made companies more confident about raising prices as commodity costs increase. PT Indofood CBP Sukses Makmur boosted the price of its instant noodles by 100 rupiah a pack last month.

Growth Objective

President Susilo Bambang Yudhoyono seeks to expand the economy at an annual average rate of 6.6 percent and create 10.7 million jobs by the end of his second term in 2014, including through attempts to boost investment in the country’s infrastructure. Foreign and domestic investment in Indonesia totaled 208.5 trillion rupiah ($23 billion) in 2010, Investment Coordinating Board Chairman Gita Wirjawan said Jan. 23.

Indian and Indonesian companies last month signed accords worth about $15 billion to build airports, steel plants, a railway line and ports in the Southeast Asian nation. Indonesia will seek bids for 50 new oil and gas blocks in 2011 through tenders and direct offers to help boost output, the Energy and Minerals Resources Ministry said last year.

Moody’s Investors Service upgraded the credit rating of Southeast Asia’s largest economy on Jan. 17 to the highest level since the 1997 Asian financial crisis, citing the nation’s “economic resilience” and improving public debt position.

Indonesia is less dependent on exports compared with its neighbors, suggesting it may be more resilient to fluctuations in global business cycles. The International Monetary Fund predicts the economy will expand more than 6 percent this year.

Reducing Poverty

The government’s target to lift more people out of poverty in a country where the World Bank estimates 29 percent of the population earn less than $2 a day has boosted consumer spending and imports. The central bank had refrained from raising rates since 2008 to support the growth push.

Higher borrowing costs may help anchor inflation expectations and support the rupiah and longer-term bonds, according to Citigroup Inc. Consumer-price growth accelerated to a 21-month high of 7.02 percent in January, from 6.96 percent in December.

In a statement announcing its rate decision this month, Bank Indonesia said it will keep a “close watch on future inflation developments and strengthen the rupiah exchange-rate policy in line with measures to curb future inflationary pressures.”

The central bank expects inflation to be in the range of 4 percent to 6 percent this year and forecasts the economy will probably expand by 6 percent to 6.5 percent in 2011. Indonesia’s exports may rise 12 percent to $168 billion this year, Coordinating Minister for the Economy Hatta Rajasa said Jan. 3. Source: Bloomberg