Indonesia GDP Growth Quickens to 5.72% Amid Inflation Pressures

(Bloomberg) — Indonesia’s economy expanded faster than expected in the third quarter, giving the central bank room to tighten policy further as consumption stayed resilient despite price pressures and higher borrowing costs.

Gross domestic product rose 5.72% in the three months to September from a year ago, the statistics office said Monday. That’s the fastest increase in more than a year and beats the median estimate of a 5.6% gain in a Bloomberg survey. Output expanded 1.81% from the previous quarter, against the consensus for a 1.71% rise.

Southeast Asia’s largest economy sustained its growth momentum, against the backdrop of higher fuel prices seen to stoke inflation near a seven-year high and add pressure on Bank Indonesia to keep hiking. BI, which has raised the policy rate by 125 basis points since August, including two, half-point hikes to 4.75%, is scheduled to meet on Nov. 17.

What Bloomberg Economics Says…

Indonesia’s accelerating growth in the third quarter defied headwinds from higher inflation. The faster-than-expected expansion gives Bank Indonesia room to continue hiking rates to shore up the rupiah, though we also expect it to continue buying bonds to mitigate the risk of slower momentum ahead.

Tamara Henderson, Asean economist

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Private consumption– which accounts for more than half of domestic output — rose 5.39% last quarter, though slightly slower than the 5.51% in the April-June period. Middle and upper-class consumption strengthened, while spending among the lower-income segment was supported by government’s social aid, said Margo Yuwono, head of the nation’s statistics office.

The boom in commodity exports continued to bolster the nation’s external trade, even as imports gained pace on capital goods demand to support business activities. Foreign direct investment surged to a record last quarter as the government pushed for more downstream projects in nickel, copper and other resources.

Elbow Room

A darkening outlook on the global economy and higher borrowing costs could yet weigh on Indonesia’s growth prospects. With the Federal Reserve set on aggressive monetary tightening, the rupiah is trading near two-year lows, raising the risk of imported inflation.

The benchmark stock index extended gains after the announcement while the local currency rose and is poised to halt five days of declines.

“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,” said DBS Bank Ltd. economist Radhika Rao, who expects policy makers to deliver a third consecutive half-point increase at next week’s rate meeting.

Other Highlights

  • Exports jumped 21.64% from a year ago
  • Gross fixed capital formation rose 4.96% year-on-year
  • Nearly all business sectors expanded, led by transport and storage (25.81%), food, beverage and accommodation (17.83%) and education (12.42%)
  • Government spending shrank 2.88% year-on-year