Indonesia GDP Growth Unexpectedly Accelerates to 6.4%

By Aloysius Unditu and Arijit Ghosh

Aug. 14 (Bloomberg) -- Indonesia's economic growth unexpectedly accelerated in the second quarter as demand for the nation's coal, palm oil and rubber pushed exports to a record.

Southeast Asia's largest economy expanded 6.4 percent from a year earlier, after growing 6.3 percent in the previous three months, the Central Statistics Bureau said in Jakarta today. Economists expected a 6.1 percent gain.

Indonesia's exports reached an unprecedented $12.9 billion in June as rising shipments to India and China offset weaker demand from the U.S., Asia's biggest market. Stronger overseas sales may allow the central bank to raise interest rates from an 18-month high to tame inflation.

``Growth has been above potential and has been fanning inflationary pressures,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. ``We are penciling in a fair amount of tightening from the central bank, which at the end of the day will feed back into slowing domestic demand.''

Sofat expects Bank Indonesia to increase its policy rate to 10.5 percent in 2009, slowing economic growth to 4.9 percent. That would be the weakest pace of expansion since 2003 and below the government's 6.2 percent forecast.

The central bank raised its benchmark rate for a fourth month on Aug. 5, to 9 percent. Consumer prices jumped 11.9 percent in July from a year earlier and bank loans increased 32 percent. Wholesale-price inflation accelerated to 34.7 percent in June, the fastest pace in nine years.

`A Bit Lucky'

``We are a bit lucky that we don't have to worry about growth,'' central bank Deputy Governor Hartadi Sarwono said in an interview on Aug. 8. ``We can live with 6 percent growth, but we can't live with inflation more than 10 percent.''

Cheap credit till May and rising sales of coal, palm oil and rubber boosted rural incomes and spending, particularly in provinces in Sumatra and the Indonesian part of Borneo island, which produce most of the nation's palm oil. Sumatra and Borneo also produce the biggest share of the country's rubber, with Sulawesi producing most of its cocoa.

``Consumers in those islands are benefiting,'' said Daniel Budirahayu, a director with PT Bank Mega in Jakarta. ``That translates into higher loan demand especially for working capital from consumers and business.''

Car sales surged to a record 54,631 units in June, helping PT Astra International, the nation's biggest car retailer, post a record quarterly profit in the second quarter. Bank Mega forecasts a 35 percent credit expansion this year.

Growth Target

Indonesia's gross domestic product expanded 2.4 percent in the second quarter from the previous three months, according to today's report. Economists were expecting a 2.2 percent gain.

``It was surprisingly good,'' said Ryan Kiryanto, an economist at PT Bank Negara Indonesia in Jakarta. ``Even if we expand a bit slower in the next quarters,'' the government may be able to meet its growth target. The government expects the economy to expand 6.3 percent this year.

Still, a decline in commodity prices since the end of June may reduce farmer incomes and damp consumption, which accounts for about 70 percent of the $365 billion economy.

``Downside risks are associated with a less favorable external environment, a possible slump in commodity prices, and remaining vulnerability to spikes in global risk aversion and contagion from other emerging markets,'' the International Monetary Fund said in a report published on Aug. 12.

Palm oil in Malaysia has declined 42 percent from its March 4 record. Coal prices at Australia's Newcastle port, a benchmark for Asia, fell 2.6 percent last week to $156.16 a ton, according to the globalCOAL NEWC Index.

``The key is how the negative impact of lower commodity exports can be offset,'' said Fauzi Ichsan, chief economist at Standard Chartered Plc in Jakarta. ``Infrastructure development'' can help.

To contact the reporter on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; To contact the reporter on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net.