Indonesia's Q2 GDP grew at 6.5pc y/y, matching forecast

JAKARTA: Indonesia's economy grew by 6.5 percent in the second quarter of 2011 from a year earlier, data showed on Friday, in line with forecasts.

"I think the main challenge is that the government and central bank must maintain the growth, given the global economy is slowing down. I think, first is to maintain domestic demand as it represents almost 70 percent of our total GDP and it means the central bank has to maintain the benchmark rate. If they raise it, it will be counter-productive to maintain the growth. The government must also maintain low inflation pressures by making sure distribution of goods across the country.

"The government must also maintain the growth of foreign direct investment to Indonesia by giving tax incentives as well as fix regulatory issues on infrastructure development by completing the land bill as soon as possible in order to give more certainty to investor. If we fail to do so, we might follow the slowdown that happens all across the world."

"It was in-line. Our forecast was 2.9 Q/Q. It does not impact our annual forecast for growth at 6.5 percent. As the need for tightening arises, we'll probably see the central bank use more quantitative tightening measures ... The worry is, we've seen good signs and the competition of growth is becoming more broad based, but there is a slowing in the narrowing output gap. I don't think there are any wider implications for Asian policy."

"The strong growth outcome validates expectations that the economy could outperform its regional peers this year, with strong support from domestic consumption and firm external sector. This will also alleviate any nagging worries on Bank Indonesia's mind, though with little need or signs that central bank will embark on tightening bias for now suggests that the economy will enjoy 'sweet spot' of stable inflation and sustained growth outlook - likely to remain a magnet for investors after risk-off clouds clear."

Markets shrugged off the in-line growth numbers on the back of global risk aversion, hitting markets world-wide. Indonesia's composite index fell 5 percent, tracking other markets.

The rupiah rose to 8,535 per dollar after the data release from 8,495 a day before.

Indonesia's 10-year bond yield was steady at 6.85 percent.

Indonesia's gross domestic product (GDP) in the second quarter had been forecast by analysts to grow at 6.5 percent from a year ago, the same pace as the previous quarter, as Southeast Asia's largest economy saw strong investment and export growth.

The Q2 growth was in line with the central bank's estimate of 6.4 percent growth between April and June. It sees the economy growing as much as 6.8 percent this year.

Indonesia's economy, which is being driven more by domestic demand than exports, grew by 6.1 percent last year and is estimated to expand 6.5 percent in 2011, the finance ministry said.

Total investment grew by 22 percent in the second quarter from a year earlier, with foreign direct investment rising 21 percent and on track for a record high, said the country's investment board.

Export growth reached 36 percent in the first half due to strong sales of commodities such as palm oil and rubber, and total exports may surpass a record $200 billion this year, said the country's statistics bureau.

Consumption, which fuels about 60 percent of the economy, remained strong between April and June, leading companies like vehicle firm Astra International to book a 26 percent jump in net profit.

Economists have not seen any signs of economic bubble, but the central bank said it might issue a policy to slow loan growth in certain sectors if it rises too fast.

Indonesia's annual inflation slowed in July to a 14-month low of 4.6 percent, well within the central bank's year-end target of 4 to 6 percent.

The central bank is seen leaving its benchmark overnight rate on hold again at its meeting on Aug 9 and some economists now see the rate may be kept at 6.75 percent throughout this year.

Export growth reached 36 percent in the first half due to strong sales of commodities such as palm oil and rubber, and total exports may surpass a record $200 billion this year, said the country's statistics bureau.

Copyright Reuters, 2011