Southeast Asia’s biggest economy is suffering because of a drop in demand from China for its commodity exports such as coal and rubber, and tightened monetary policy, which was implemented last year to stem capital outflows.
Mr Widodo, who took office last month, has pledged to boost growth to 7 per cent by increasing infrastructure spending, cutting red tape for businesses and reallocating wasteful energy subsidies to more productive uses.
But he faces political deadlock at home, while having to contend with lower Chinese growth and the prospect of US interest rate rises sparking further outflows from Indonesia, which is reliant on foreign investors to fund its current account deficit.
After peaking at 6.5 per cent in 2011, GDP growth in Indonesia has fallen behind other Southeast Asian economies such as Malaysia and the Philippines, which are growing at 6.4 per cent, and Vietnam, which is growing at 6.2 per cent.
“We doubt that growth will slow much further from here but we don’t expect it to rebound either,” said Gareth Leather, an analyst at Capital Economics. “Commodity prices are likely to remain depressed, which will drag on exports and investment, while monetary policy looks set to remain tight in order to prevent the current account deficit from widening.”
Like his counterpart Narendra Modi in India, Mr Widodo has raised expectations for economic reform in Indonesia.
But Mr Widodo has started slowly, appointing an unspectacular cabinet that disappointed both at home and overseas.
Investors are now waiting to see if and when he cuts the $21bn fuel subsidy bill by raising petrol prices – a vital reform if he is to free up funds to upgrade the country’s woeful infrastructure.
Jusuf Kalla, vice-president, has said the price rise will come soon but the government has not set a clear time frame.
Source: http://www.ft.com/cms/s/0/84508698-64a8-11e4-bb43-00144feabdc0.html#ixzz3IAfYFjyw