Exports improve as currently slide continues
Policymakers face an awkward range of challenges ahead of elections in 2014. They must consider how to address slowing growth, high inflation (in excess of 8% since July, following fuel subsidy cuts), a falling currency and the current account deficit. As a result, even though annual GDP growth has been slowing for five straight quarters, the central bank raised interest rates five times in 2013.
GDP expanded by 5.6% over the year in Q3 – the slowest pace since 2009 – as financial market volatility hit investment and export demand remained weak. On the other hand, private spending expanded by a robust 5.5% over the year, despite high inflation. And lower inflation in 2014 should boost purchasing power. Real government spending rose strongly in Q3 as some infrastructure projects were brought forward. And we expect strong government spending to continue, particularly in light of the upcoming elections and the redirection of funds previously spent on fuel subsidies to infrastructure projects.
In 2014, we expect GDP growth to further slow to 5.4%. Export growth, however, should be very solid, supported by the weaker currency. The rupiah has been trading above IDR12,000 to the US$ since mid-December, and the central bank has accepted that this weaker level is broadly in line with fundamentals.
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