Moderating investment and sluggish external demand curtailed growth in Southeast Asia’s biggest economy in 2013. The authorities took steps to dampen domestic demand after inflation spiked, the rupiah weakened, and the current account deficit widened. Growth is forecast to dip slightly in 2014 before recovering next year. Inflation is seen easing and the external position improving through the forecast period.

Economic performance

Growth in gross domestic product (GDP) moderated to 5.8% in 2013 from an average of 6.3% over the previous 3 years, as investment decelerated sharply. Bank Indonesia, the central bank, raised interest rates to restrain domestic demand at a time of rising inflation and a widening current account deficit.

Growth in fixed investment slowed to 4.7% in 2013 after strong increases of about 9% annually in 2010-2012. This largely reflected the impact higher interest rates and rupiah depreciation had on investment in machinery and equipment. Investment in buildings held up relatively well. The central government’s capital spending moderated, though it still expanded by 18.4%. Gross fixed investment as a share of GDP edged down to 31.7%.

Private consumption remained robust in 2013, expanding by 5.3% and contributing half of the growth in GDP on the expenditure side.

Government consumption grew by 4.9%, which signaled some improvement in budget execution. Higher net exports of goods and services made a significant contribution to GDP growth last year, despite weakness in major export markets. This improvement resulted from import restraint caused by the rupiah depreciation and slower investment, together with modest growth in export volumes.

From the production side, growth in services ebbed to 7.1%, but this sector still contributed 3.3 percentage points of total growth. Robust growth of at least 7.0% was recorded in transport, communications, finance, and hotels. Manufacturing expanded by 5.6%, little changed from the previous year, and it added 1.4 percentage points to GDP growth.

Bad weather and sagging global prices for palm oil and rubber slowed growth in agriculture to 3.5%. Mining output grew by just 1.3%, reflecting growth in coal and metals but contraction in oil and natural gas.

Selected Economic Indicators (%) - Indonesia 2014 2015
GDP Growth 5.7 6.0
Inflation 5.7 4.8
Current Account Balance (share of GDP) -2.9 -2.0

Source: Asian Development Outlook (ADO) 2014; ADB estimates.

Economic prospects

Forecasts assume that the government follows through with the stabilization policies rolled out in the second half of 2013 and that parliamentary elections in April and presidential elections in July go smoothly. Projections also assume that steps are taken to improve the investment environment.

On this basis, GDP growth is forecast at 5.7% in 2014 picking up to 6.0% in 2015.

Source: ADB. 2014. Asian Development Outlook 2014. Manila.