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Indonesia's growth slows as consumption fails to pick up

After tsunami and plane crash, more headwinds hit Joko Widodo ahead of election

Consumer spending in Indonesia turns out to be lackluster in third quarter.   © AP

JAKARTA -- Indonesia's economic growth slowed for the third quarter of this year as consumption failed to pick up despite the country hosting a major sports event during the period.

Badan Pusat Statistik, the country's central statistics agency, on Monday said gross domestic product had grown by an inflation-adjusted 5.17% on an annual basis in the three months to September, slower than in the second quarter when it clocked 5.27% growth, the fastest pace since the fourth quarter of 2013.

The latest figures were above the Reuters consensus forecast of 5.15%. The official government growth target for this year is 5.4%.

The slowdown is more unwelcome news for President Joko Widodo, who has had to grapple with multiple adversities in recent months -- the earthquake and tsunami in Palu as well as last week's crash of a Lion Air flight.

Growth in private consumption, which accounts for over half of GDP, marginally slowed to a 5.01% year on year increase from 5.14% in second quarter, despite the country hosting the Asian Games in Jakarta and Palembang during the period. Large events tend to increase consumption.

Exports grew at a slower pace, a big drag on the economy. Imports also slowed.

The U.S.-China trade war is likely to weigh on the country's exports going forward as well.

"Our forecast is for global growth to slow gradually over the coming quarters, which would weigh on demand for the country's exports," said Alex Holmes, emerging Asia economist at Capital Economics. "Export revenues are also set to be held back by lower commodity prices."

The economist added that fiscal policy is likely to be a damper as well, as the country's budget for 2019 penciled in a deficit of 1.8% of GDP, a narrower target compared to this year's 2.1%. In addition, "monetary policy is likely to drag on growth," Homes said. "Bank Indonesia has raised interest rates by 150 basis points this year to support the rupiah. Further rate hikes are likely before the end of the year."

As it heads into a crucial presidential election next year, the archipelago also faces a slowdown in foreign investment -- investors grow wary of uncertainties in the lead up to elections. Foreign direct investment in Indonesia fell 20.2% in the three months ended in September, a second straight quarter of decrease.

Although Widodo is favored to win a second term, how he deals with a multitude of problems could swing the tide to Prabowo Subianto, who has been keen to scrutinize every perceived misstep by the president.

Aside from the natural disasters and corporate gaffes, which remain out of the president's hands, the sliding currency is a primary concern. The rupiah has fallen over 9% since the start of the year, leading to mounting inflationary pressures. The country's headline inflation rose to 3.16% year-over-year in October from 2.88% in September, due to higher food, housing and transportation prices.

The country has also seemingly hit a dry patch in bureaucratic reforms; in the latest Doing Business ranking, Indonesia slipped one place to 73rd. It had been aiming to be No. 40.

On a quarterly, non-seasonally adjusted basis, the economy expanded by 3.09%, after growing 4.21% in the second quarter.

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