Published: February 6, 2012
JAKARTA: Indonesia’s economy expanded 6.5 percent in the fourth quarter to seal the highest full-year growth in 15 years, a rare case of strength in Asia in the face of Europe’s debt crisis that suggests the central bank will keep rates steady this week.
While other Asian economies, including emerging giants such as China and India, have seen growth slow sharply in the past year as exports felt the euro debt chill, Indonesia has maintained growth above 6 percent for five straight quarters.
“Indonesia is one of the least exposed economies in the region, with a vast domestic market and a relatively small share of exports to GDP, so is anyway insulated from volatility in the global economy,” said George Worthington, economist for IFR in Sydney. IFR is a unit of Thomson Reuters.
Figures on Monday showed fourth-quarter growth was stronger than the 6.4 percent forecast in a Reuters poll and held at the same pace as the third and second quarters. Weakening exports growth was more than offset by strength in domestic consumption in a G20 economy that has seen a fourfold increase in GDP per capita in the past decade.
Full-year growth of 6.5 percent was the strongest since 1996; another milestone after ratings agencies in recent months restored the country’s investment-grade credit rating for the first time since the Asian financial crisis. Economists expect weakening exports to rein in growth this year to 6.1 percent. That would still be the third year in a row that growth has topped 6 percent.
The central bank slashed its policy rate by 75 basis points in October and November to a record low of 6 percent to shield the domestic economy from the euro area debt crisis.
At the time, some analysts reckoned the central bank had overreacted given the economy wasn’t showing any major signs of stress, unlike some of its export-reliant neighbours.
Some economists argue the strong GDP figures mean expectations for a further rate cut on Thursday, when the central bank meets to review policy, are now overdone. “It would be better to hold off from easing now, preserving plenty of ammunition if the global economy heads for a steeper slowdown than currently envisaged,” Worthington said.
But even if the central bank keeps policy unchanged on Thursday, some economists worry record-low interest rates, strong domestic consumption and the president’s desire for the economy to achieve 7 percent growth by 2014 could prove an incendiary combination.
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