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Indonesia Budget Spending Starts to Help

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

Unemployed for much of 2015, Firman Agung now works for the Indonesian government, racing to dig a drainage ditch through his village before monsoon rains begin.

“It beats sitting around at home,” said the 32-year-old as he mixed cement under the shade of a mango tree in Pakuncen, a dusty farming village on the western end of Java island. “At least now I have something to bring home for my wife and child.”

After a slow start to the year, Indonesia is speeding up government spending, seeking to stimulate an economy growing at its slowest pace since 2009. The pickup may start to be reflected in gross domestic product data due on Thursday, with a Bloomberg survey forecasting 4.8 percent growth in the three months through September from a year earlier, versus 4.67 percent in the previous quarter.

“Government disbursement of budget funds has gained traction, which is likely to yield some growth dividend,” said Bharti Bhargava, an economist with Oxford Economics Ltd. “The pickup in cement sales and bank loans all support our view.”

Cement consumption jumped 17 percent in August from a year earlier, the biggest rise in a year, while banks’ loan growth quickened to 10.9 percent. However, commodity exports and manufacturing remain weak, with the largest listed conglomerate PT Astra International posting a fourth consecutive profit decline in the third quarter. Investors are looking at government spending as the main driver of Southeast Asia’s largest economy.

Breaking Ground

Only 35 percent of the 2015 budget had been spent by late June. On Monday, President Joko Widodo, better known as Jokowi, said the government had spent 70 percent of it and expected to disburse up to 94 percent by the end of the year.

“At the very least, this will support our GDP in the third quarter,” Finance Minister Bambang Brodjonegoro said on Tuesday at a budget briefing.

Interest-rate cuts could also stimulate growth, but Bank Indonesia has been on hold since February, unable to loosen policy because of a sharp depreciation in the rupiah and Asia’s fastest inflation rate. The central bank, which next meets on Nov. 17, signaled last month it sees room to ease policy amid gains in the currency and declining odds of a 2015 Federal Reserve rate increase.

Thursday’s data might give policy makers hope the economy has bottomed out, following a series of measures by Jokowi in recent months aimed at helping business confidence. After promising 7 percent growth upon taking office last October, he reshuffled his cabinet in August to improve delivery. The government is now targeting 5.3 percent expansion next year.

Thirteen locals are at work digging and lining drains on either side of the road in Pakuncen, one of several labor-intensive projects such as paving paths and building small irrigation dams that have been rolled out over the last two months in the district. They are part of a $1.5 billion nationwide village infrastructure program, introduced for the first time this year.

Regional Need

As growth dipped this year, national government officials began urging regional counterparts to spend funds stuck in regional bank accounts. Complex procedures for withdrawing the money and fear of getting caught up in corruption probes have been cited as reasons for the slow dispersal.

“We try and find projects that benefit the people, but the important thing is we spend the money,” said village secretary Fuad, sitting on a battered sofa in his office next to the mosque. “There is plenty of need around here.”

Domestic consumption, which accounts for more than half of the economy, has been slowing this year, seen in lower car sales and falls in consumer confidence surveys.

However, cigarette manufacturer PT Gudang Garam, regarded as a bell weather for consumer demand in the tobacco-addicted nation, recorded a 28 percent rise in net income in the third quarter after profit falls in the first half of the year.

The rupiah being injected into Pakuncen is making its way to at least one retailer.

Holia, the owner of a stall across the road from the drainage project, has seen her daily revenues almost double on a constant stream of workers buying cigarettes, coffee and cheap snacks.

“It’s been a windfall,” she said. “But how long it will last I don’t know.”

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