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Economy

Indonesia growth stunted by delays to Widodo infrastructure push

President's industrial reforms in spotlight after failure to hit GDP target

A department store in Indonesia (Photo by Shinya Sawai)

JAKARTA -- Indonesia's gross domestic product grew 5.07% in 2017, falling short of the government's 5.2% target, as President Joko Widodo's industrial reforms failed to pick up enough steam to tap into the brisk global economy.

The growth rate last year was slightly higher than 2016's 5.03%, the government's Statistics Indonesia agency reported Monday. GDP expanded 5.19% for the October-December quarter.

Domestic and foreign analysts believe Indonesia is capable of achieving roughly 6% growth as the largest economy in Southeast Asia and a Group of 20 member. But progress has been stunted at around 5% since Widodo took office in October 2014.

The disappointing results stem from delays in the country's ambitious $450 billion infrastructure plan and industrial development as well as its inability to escape from economic dependence on natural resource exports. Since taking office, Widodo has made some strides in infrastructure, such as high-speed rail lines and regional airports, but major projects like a large-scale power plant are behind schedule.

Widodo plans to use infrastructure development to make Indonesian industries like manufacturing more internationally competitive by lowering logistics costs, which are seen rising to 30% of GDP. His administration hopes that developing local industry, including investment from foreign companies, will translate into growth by boosting employment and consumption.

The government has also taken drastic measures to encourage a shift away from natural resource exports. It essentially banned outbound shipments of unprocessed ore of nickel and other metal, requiring that a certain amount be processed domestically.

In the 2000s, Indonesia showed some of the highest growth among emerging nations, thanks to soaring natural resource prices. But growth has slowed of late as natural resources prices come back down.

Auto manufacturing is seen as a promising alternative to resources for export. Car exports are climbing, topping 200,000 units in 2017. But there is still room for improvement, said one industry group executive, who noted that Thailand is opening up a big lead in the field.

President Joko Widodo, center, inspects a model of the high-speed train that will connect Jakarta to the country's fourth largest city, Bandung, during a groundbreaking ceremony for the project's construction in Cikalong Wetan, Indonesia, in January 2017.   © AP

Consumer spending is also weak. Indonesian central bank statistics show that monthly retail sales saw single-digit year-on-year growth nearly every month last year -- compared to mostly double-digit figures until 2016 -- as soaring demand from the middle-class begins to level off.

Representative of the drastic spike and plateau in consumption are motorcycles and smartphones. Over 8 million motorbikes were sold in 2011, but sales fell to under 6 million last year, given their prevalence in the country now. Smartphone sales have also dulled, now that more than half of Indonesians own one.

Lackluster wage increases are also impacting consumer sentiment. The minimum wage increase for this year, as mandated by the government, is the lowest in the last few years at just over 8%.

The Indonesian government forecasts 5.4% GDP growth for 2018, when the country will hold gubernatorial elections in major states considered the opening rounds of next year's presidential election. Consumption is likely to grow as political parties raise their expenditures and other temporary spending with the election in mind.

Widodo has vowed to continue his policies, but he will need to show that he can quickly implement measures as the 2019 election approaches.

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