Reuters
JAKARTA - Indonesia's economy grew in the fourth quarter of 2010 at the strongest pace in six years, blowing past expectations and increasing the chances of steeper rate hikes in coming months to head off inflationary pressures.
For 2010 as a whole, Southeast Asia's top economy expanded 6.1 per cent, underscoring some expectations that the G20 member is in line for a coveted investment grade credit rating in the next year or so to place it alongside the so-called BRIC nations of Brazil, Russia, India and China.
Gross domestic product rose in the fourth quarter by 6.9 per cent over a year earlier , well above even the most optimistic forecast of 6.5 per cent in a Reuters poll, helping explain the central bank's concern about a buildup of inflationary pressure that prompted it to raise interest rates on Friday.
"The growth outlook remains robust. This will attract more investment into Indonesia. Inflation remains at the forefront of Bank Indonesia's policy concerns with back-to-back 7 per cent or higher inflation," said Prakriti Sofat, an economist at Barclays in Singapore.
"In the next three to four months we expect up to a 75 basis points rise in interest rates," she said.
That would be in line with a Reuters poll conducted last week before the central bank surprised markets on Friday by raising its policy rate by 25 basis points to 6.75 per cent from a record low of 6.5 per cent.
The poll predicted the policy rate would rise to 7.5 per cent by the end of 2011.
Analysts have been clamouring for Bank Indonesia to hike rates for the past year, following regional peers.
Indeed, worries that the central bank was behind the curve in tackling inflation, which reached a 21-month high of 7.02 percent in January , led to a sell-off in bonds and stocks last month, after the country had been an investor darling in 2010.
But Friday's rate rise, the first in nearly two years, helped ease those concerns and Monday's GDP data reinforced the view that the central bank will have to keep raising rates to counter the threat of inflation as the economy expands.
After the GDP data, the stock market picked up from negative territory to trade steady, with the rally led by top car seller Astra International and banks, while the rupiah edged up to a 3-month high.
Ten-year bond yields have pulled back sharply by more than 70 basis points as investors hunted for bargains after the January sell off.
Investment new growth engine
The fourth-quarter growth, driven by government spending, domestic consumption and investment, added to other figures showing economies in Southeast Asia grew strongly into the end of the year.
Singapore's gross domestic product rose 12.5 per cent and the Philippines 7.1 per cent from a year earlier.
Before Monday's data, economists had expected Indonesia to grow 6.2 per cent in 2011, versus a government forecast of 6.4 per cent.
President Susilo Bambang Yudhoyono is aiming for 7.7 per cent annual growth by 2014, though analysts say the country would need to speed up progress on overhauling infrastructure to achieve that goal.
The government said on Monday it aims for $US150 billion of infrastructure investments by 2015, but is relying on foreign investors for two-thirds of that amount. Japan has already pledged about $US53 billion over 15 years and is funding a metro line for Jakarta.
But for now, airports, ports and roads are overwhelmed. Car sales jumped 57 per cent in 2010 to a record as an emerging middle class in the world's fourth-most-populous nation snapped up new models in a market dominated by Toyota .
The statistics bureau said each percentage point rise in GDP growth adds over half a million new jobs.
Private consumption growth slowed in the fourth quarter versus the third, but government expenditure and exports both accelerated.
Government spending in Indonesia usually picks up the fourth quarter as authorities rush to meet targets, with low spending earlier in 2010 leading to a cut in debt issuance. Falling government debt to GDP levels have spurred rating upgrades.
Wellian Wiranto, an economist with HSBC in Singapore, described Monday's GDP growth figure in a report as "a wow number" that meant the central bank should not be shy to continue brandishing its recently-adopted tightening stance.
"Today's GDP data also shows a subtle but important shift in Indonesia's growth story. It is no longer all about domestic consumption anymore... Taking an increasingly larger share of GDP is investment," he said in a research report.
Total realised investment grew 54 per cent last year, with foreign direct investment rising to a record $US16.4 billion as firms -- particularly from Asia -- put money into plants to make goods from shoes to tyres, or to extract mineral resources.
Indonesia, the world's top exporter of thermal coal and tin and the biggest producer of palm oil, has benefited from the rise in many commodity prices.
State miner Timah said on Monday tin sales fell 18 per cent last year, but profits more than doubled as tin prices surged to record highs.
Investors have bought into Indonesia's growth and reform story. Although Indonesia does not produce the strongest economic growth in Asia, it has a massive domestic consumer market and the president is pressing economic reform.
Relatively high interest rates compared to low levels in developed nations following the end of the global financial crisis have also helped.
Local-currency bonds returned more than 80 per cent over the course of 2009 and 2010 in US dollar terms and the stock market rose 173 per cent over the same period.
Indonesia's economic resilience -- it avoided recession during the global crisis -- and the government's fiscal health were rewarded in January when Moody's Investors Service raised its credit rating on the country by one notch and to within one level of the coveted investment grade.
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