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Indonesia's Q3 growth weakest in four years, rates seen on hold

By Nilufar Rizki and Rieka Rahadiana

JAKARTA (Reuters) - Indonesia's economy grew at its slowest in nearly four years in the third quarter, as weak exports risk leaving its trade balance in deficit and the rupiah vulnerable to further falls.

Growth is expected to ease further in the coming quarters as the effects of higher interest rates and fuel costs feed through the economy.

Southeast Asia's largest economy is running large trade and current-account deficits this year, which have made it a target of portfolio investors shifting funds out of emerging markets and knocked the rupiah to 4-1/2-year lows.

Gross domestic product in the July-September quarter grew 5.62 percent, data from the statistics bureau showed on Wednesday. The pace matched estimates in a Reuters poll and compared with 5.81 percent growth in April-June.

"We very much doubt GDP growth has hit bottom yet - in fact we would be surprised if it did for another year or so, by which time the year-on-year rate is likely to have slipped below 5 percent," Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse, said in a report.

"The main reason for the slowdown so far has been the end of the commodity super-cycle, which has hit mining profits and investment."

The Reuters poll had projected growth of 5.6 percent from a year earlier, and 2.93 percent against the prior quarter.

Some analysts noted that the deceleration in growth stemmed mainly from the business sector while private consumption, which influences imports, was much stronger than expected.

Domestic consumption, the main growth engine in the G20 economy, grew 5.48 percent year-on-year and was faster than the 5.06 percent clip the previous quarter, data showed.

"While we continue to look for BI to stand pat when it meets next Tuesday, the central bank needs to more closely scrutinise if the tightening since June is having the desired dampening impact on household activity," Su Sian Lim, ASEAN economist at HSBC, said in a research report.

"For the current account deficit to narrow, a broader domestic slowdown is necessary."

Indonesia is expected to post an overall trade deficit of $6-8 billion in 2013, widening from $1.63 billion deficit last year, a factor that will continue to hurt its exchange rate.The rupiah fell as much as 0.7 percent to 11,420 per dollar in Wednesday trade.


While the pressure on the rupiah has eased somewhat as the Federal Reserve delayed winding down monetary stimulus, a renewed attack on Asia's worst performing currency could resume with speculation over the timing of U.S. tapering.

Weak exports hampered by a tentative global recovery will make it harder for Indonesian policymakers to keep the country's deficits at a sustainable level as growth slows.

"We (initially) expected full-year growth of 5.8 percent. But with the downside risk, we are considering reviewing our forecast. There will be a further slowdown in the final quarter," said Eric A. Sugandi, economist at Standard Chartered in Jakarta.

Bank Indonesia's 2013 GDP target is 5.5-5.9 percent.

With inflation moderating, analysts see the central bank likely standing pat on rates at its policy review on November 12.

Aiming to cool excessive lending, restrain inflation sparked by higher fuel costs from subsidy cuts, and stem capital outflows, Bank Indonesia lifted its key reference rate by a total of 150 basis points since June.

The government in August unveiled a fiscal package to revive confidence by promoting investment, reducing imports and propping up its tumbling rupiah currency. It is soon expected to announce additional fiscal measures to help boost exports and investment, and further reduce imports particularly for capital goods.

Indonesia was popular with investors after it secured investment grade status in 2011 and 2012 from two rating agencies. But its glow as an investor haven is fading.

The G20 economy, which heavily relies on imported goods to meet domestic demand, posted a sizeable current-account deficit that hit 4.4 percent of GDP in April to June period.

The rupiah has lost 15 percent so far this year as foreign investors dumped Indonesian assets on concerns over its ability to fund the economy and some of its economic policies.

Indonesia will hold parliamentary elections in April, followed by a presidential election planned for July.

(Additional reporting by Adriana Nina Kusuma; Editing by Jacqueline Wong)