A calm has returned to the streets of Jakarta, but it is an uneasy one. Eight deaths were recorded in the violence which followed the results of last month’s Indonesian presidential election. Prabowo Subianto, the defeated candidate, has called for calm and told his supporters to wait for the courts to rule on his legal challenge. 

The victory of Joko Widodo, popularly known as Jokowi, earned Indonesia a ratings upgrade from Standard & Poor’s. However, south-east Asia’s biggest economy faces immediate headwinds, and these point to a more difficult second term for the Indonesian president. 

Heightened security risks and the potential for more political instability are likely to weigh on an economy that is already under pressure from falling foreign investment, weak consumer sentiment and an underperforming rupiah. 

Growth may still come in at a respectable 5 per cent this year but it is likely to fall short of the government’s target, and be far less than is needed to push Indonesia out of the “middle-income trap”. 

Persistent weaknesses 

Even before the deadly election protests, our research identified persistent weaknesses in the outlook for household consumption, which contributed 55 per cent to Indonesia’s economy last year. 

Our March survey, which was held about three weeks before the election, found consumer views on the economic and political outlooks at their strongest on record. Indonesians felt generally upbeat about the prospects of a peaceful election — power transitions in Indonesia were mostly quiet affairs since the dictator Suharto was ousted in 1998 — and economic activity returning to normal. 

But improved sentiment did not translate into stronger loan demand, nor willingness to spend on big-ticket items like cars and property. Our forward-looking Future Consumer Borrowing Index dropped to 44.9, the lowest level on record. 

The Property Purchase Index, which gauges buying intentions within a six-month period, extended its quarterly drop to 41.6. This index has remained below 50 for the past four quarters, suggesting that demand for property has remained below 2017 averages. 

Bank Indonesia’s quarterly review of the property market shows price growth continuing to slow in the past three quarters, confirming our view that a weak currency and higher interest rates are hurting the market’s recovery. Standard & Poor’s has warned that weak presales point to flat revenue for most developers this year. 

While motorbike sales growth was relatively strong in the first quarter, even as car sales fell, they are likely to cool from here as a result of a confluence of factors, ranging from low palm oil prices to high interest rates. 

Losing growth momentum 

Slower household consumption growth and weaker global demand for Indonesian goods saw first-quarter GDP growing a slower-than-expected 5.07 per cent year on year, down from 5.18 per cent in the previous quarter. 

As of April, Indonesia’s trade deficit stood at $2.6bn, nearly 90 per cent higher year on year. On top of weak global demand, dwindling crude production and rising domestic demand for diesel and petrol are contributing significantly to Indonesia’s poor trade performance. 

Although a new biofuel standards policy has helped reduce the oil and gas trade’s responsibility for the deficit, Indonesia still needs to do more to curb fuel imports as the risk of higher oil prices increases with US pressure on Iran. 

Foreign investment is also underperforming as Indonesia loses out to regional competitors, such as Vietnam and Thailand, because of policy shortcomings and a less competitive labour market. 

More Trump contagion 

The sudden collapse of US-China trade talks presents a renewed threat to Indonesia’s growth outlook. Not only are the US and China the country’s two largest export destinations, but the imposition of higher tariffs on Chinese exports to the US has triggered renewed speculation that Beijing will let the renminbi depreciate to help cushion China’s export sector. 

This puts Bank Indonesia in a bind. Even as other south-east Asian central banks have taken advantage of a dovish Federal Reserve to relax monetary policy, a weakening Chinese currency is a direct threat to the rupiah and limits Bank Indonesia’s scope to cut rates. 

The bank raised rates by a combined 175 basis points last year, and cooling inflation does provide some room to relax its stance. However, a yawning current account deficit combined with the threat of a weaker renminbi argues for caution, and that could leave businesses and consumers with little choice but to tighten their belts. 

The upshot is that Indonesia is likely to miss its official GDP growth target of 5.3 per cent this year. The International Monetary Fund is forecasting 5.2 per cent growth, but growth of 5 per cent is more likely because of the drag from the household sector. 

That may be respectable, even by emerging market standards, but economists believe that Indonesia needs to grow in the 7 per cent range if it is to escape the “middle-income trap” and vault to becoming a high-income country. 

In the near term, with a full-blown trade war looming, we see no catalysts for Indonesia to do so. 

Andi Haswidi, senior researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.