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Indonesia Surprises with Strongest Growth in 10 Quarters

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Workers at a construction site for an office high-rise building in the Indonesian capital city of Jakarta on September 5, 2014. ROMEO GACAD/ AFP/ Getty Images

Indonesia surprised with its strongest growth in 10 quarters in April-June, spurring some economists to predict it will outperform most Southeast Asian nations the rest of this year.

However, others cautioned that Indonesia needs more private investment to sustainably raise its growth rate, as a widening budget deficit means government spending – which helped lift annual growth to 5.18% in the second quarter – has to be contained.

The annual growth rate for April-June, announced on Friday, was the highest since the last quarter of 2013, nearly a year before Joko Widodo became president. A Reuters poll predicted 5%.

The new number “foreshadows what we expect to be Indonesia’s ascent to be one of the outperforming economies in ASEAN,” ANZ wrote.

Wellian Wiranto of OCBC in Singapore called Indonesia a “momentum play,” saying the data “adds oomph to positive sentiment” about Indonesia.

The Jakarta stock exchange benchmark, up 18% this year, rose 0.5% after the gross domestic product data.

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One reason markets have been upbeat is Widodo’s recent cabinet reshuffle that saw Sri Mulyani Indrawati, a widely-respected reformer, leave the World Bank after six years and return to being finance minister.

ANZ said the reshuffle “suggests a cementing of the reform agenda.”

DENTED EXPORT EARNINGS

The statistics bureau credited the second quarter’s growth on higher commodity prices and government spending, solid consumption, and better crops.

Low global commodity prices have hurt Indonesia for years, denting export earnings, investment, state revenue and purchasing power. It was the main reason growth slowed to six-year low in 2015 to 4.8%. The economy had annual growth of 4.91% in January-March.

Household consumption, representing more than half of the country’s GDP, gained in the second quarter as people spent more money at the start of the Muslim fasting month, which this year began in June.

Gundy Cahyadi, DBS economist, said strong consumption should support growth but Indonesia needs more investment to sustain a solid pace.

He warned that the state’s contribution to growth may fall in the second half as “the pace of spending may actually ease… as the government will attempt to keep fiscal deficit in check.”

Indrawati announced on Wednesday the government will trim spending by 133.8 trillion rupiah ($10.20 billion) to make sure the budget deficit does not breach the legal limit of 3% of GDP.

TAX AMNESTY

To aid state finances and try to bring home billions of dollars Indonesians have overseas, the government last month launched a tax amnesty program.

The amnesty could provide “an additional filip to growth,” said Michael Wan, economist with Credit Suisse, which expressed a “positive view” of the Indonesian economy.

After Friday’s data, RBS upgraded its outlook for Indonesia growth this year to 5.1% from 4.9%.

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Not everyone thinks Indonesia is poised to much stronger growth in future, let alone reach the 7% target Widodo promised during his campaign.

“While we think the worst for Indonesia’s economy is now over, a combination of fiscal tightening and low commodity prices will keep growth stuck at around 5% over the next couple of years,” Capital Economics said.

Widodo has announced a series of reforms to improve the investment climate and the central bank has cut the benchmark four times this year totaling 100 basis points. Some analysts expect another cut this year.

Prior to Friday’s data, the central bank forecast GDP growth of 5.09% this year. The government’s target is 5.2%.