UPDATE 2-Indonesia Q1 growth slowest in 4 years as political risks loom

Mon May 5, 2014 6:19am EDT

Related Topics

* Q1 GDP +5.21 pct y/y vs forecast 5.60 pct in Reuters poll

* Growth bolstered by domestic consumption

* Mining sector contracted on export ban (Adds investment growth, comments, details)

By Adriana Nina Kusuma and Rieka Rahadiana

JAKARTA, May 5 (Reuters) - Indonesia's economy grew at its slowest in more than four years in the first quarter as a mineral export ban, successive interest rate rises and uncertainty over upcoming presidential elections unnerved investors.

Domestic demand remained robust, however, and even accelerated from the previous quarter, despite efforts by the central bank to tamp down inflationary pressures.

Policymakers have taken aggressive steps to shrink the country's large current-account deficit to buffer against capital outflows and inspire confidence in the rupiah.

That has made investors more optimistic about Indonesia even though many are still concerned about political risks. A smooth path to the presidential palace for frontrunner Joko "Jokowi" Widodo, whose huge popularity rests on his clean, can-do image, would likely cheer foreign investors eager to see a smooth transition.

Gross domestic product in the January-to-March quarter expanded 5.21 percent from a year earlier, data from the statistics bureau showed on Monday. That was the slowest pace since the third quarter of 2009 and compared with 5.60 percent forecast in a Reuters poll. Growth was 0.95 percent on a quarterly basis against expectations of 1.26 percent.

The mining sector contracted 0.38 percent in the first quarter from the same period a year earlier against a 3.91 percent expansion in October-December, due to restrictions in mineral exports.

On the contrary, the construction sector grew 6.54 percent from the same period a year ago as miners started building smelters, the statistics bureau said.

Meanwhile, domestic consumption -- the main driver of the economy -- grew 5.61 percent from a year earlier and was stronger than 5.25 percent growth in the previous quarter, partly driven by pre-election spending.

OCBC's economist Wellian Wiranto said resilient consumption also means that the effect of rate increases totalling 175 basis points will take a longer time to filter through the economy.

"...just because the prescription takes longer to take effect than anticipated, does not mean that the doctor should yank it away from the patient. These things take time, and BI will hopefully maintain the course of tight monetary policy," Wiranto said.

Spot rupiah fell 0.1 percent to hit a session low of 11,535 per dollar after the data, but strengthened to 11,515 in afternoon trade.

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GRAPHICS

For a graphic on Indonesia GDP, vehicle sales:

link.reuters.com/bam85s

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INVESTMENTS SLOW

Investment growth moderated in the January-March quarter, up 5.13 percent against 5.90 percent in the first quarter a year ago, data showed. Analysts says investors are waiting for a new line-up of leaders and possible policy changes.

The moderation was in line with slowing offshore investment commitments that grew 9.8 percent in January-March, far slower than 25.40 percent growth the previous quarter.

However, investment growth recovered from the last quarter of 2013 when it expanded 4.37 percent.

"Investment is quite surprising. We initially forecast it will grow 6.5 percent on a low base year, but it only grew 5 percent as investors were waiting for new administration and political stability," said CIMB Niaga's economist Wisnu Wardana.

Though moderating, investment as well as consumption are expected to bode well for the outlook this year.

Indonesia has for the first time climbed into the ranks of the world's top 10 largest economies -- a notch below the United Kingdom -- according to recent data from the World Bank.

Last year, its fortunes were far less rosy. Hit badly by capital outflows from a ballooning current-account deficit, policymakers tightened fiscal and monetary policy.

The impact from massive tightening -- raising rates by a total 175 basis points between June and November last year -- is still filtering through the economy and has not been fully reflected in commercial bank lending rates.

The central bank has estimated a current-account deficit of below 3 percent of GDP this year, down from 3.3 percent in 2013 and a record 4.4 percent in the second quarter last year.

Bank Indonesia, which will hold a policy rate meeting on May 8, has repeatedly signalled that monetary policy will remain tight to ensure a moderation in growth in spite of recent improvements in trade and inflation. Most economists expect the central bank to keep rates on hold at 7.50 percent.

Inflation has moderated and the rupiah has become Asia's top performing currency this year from being its worst last year. It is up 5.7 percent against the dollar so far this year.

The central bank is eyeing economic growth of 5.5 to 5.9 percent this year, with inflation easing to 3.5-5.5 percent from 8.38 percent last year. (Additional reporting by Nilufar Rizki, Randy Fabi and Yayat Supriatna in JAKARTA, Jongwoo Cheon in SINGAPORE; Editing by Jacqueline Wong)

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