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Days of 6-7% growth look distant for Indonesia

Hawkers before fine arts museum, taman fatahillah, jakarta, indonesia
Tom Cockrem | Photolibrary |Getty Images
Hawkers before fine arts museum, taman fatahillah, jakarta, indonesia

Investors shouldn't be fooled by a slight pick-up in Southeast Asia's largest economy in the second quarter, analysts told CNBC, as the economy is likely to underperform for some time to come.

According to a poll of Reuters' analysts, data to be released on Tuesday will show Indonesia's economy expanding 5.3 percent on an annual basis, eking up slightly from the first quarter's 5.2 percent but still markedly below the 6-7 percent growth rates enjoyed in recent years.

Wellian Wiranto, economist at Singapore's OCBC bank, expects the gross domestic product (GDP) print to come in above the Reuters' poll at 5.4 percent.

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"Last quarter's result was especially bad because of fairly poor trade numbers, including a large trade deficit. Although we still see a trade deficit in Q2, on a relative scale we'll see that trimmed down a bit and this is why we'll see Q2 numbers slightly higher than Q1," he said.

However, Wiranto added that investors shouldn't expect a sharp uptick in Indonesian growth anytime soon.

"The continued lack of investment is one of the reasons Indonesia continues to perform below its potential GDP rate of between 6 and 7 percent. The numbers we are seeing at the moment are still way below what Indonesia can achieve," he said.

The central bank has been forced to hike rates five times over the past year to prop up its flailing currency. A controversial mineral exports ban introduced in January has also proven a headwind to investment and growth.

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"We're not talking about a recession but the performance will remain sub-par," said OCBC's Wiranto.

"I think the earliest we will see growth recover to full potential will be in the second half of 2015, as we start to see sentiment improve after the elections, and a steady rise in consumption growth," he added.

Still, many analysts expect sentiment in Indonesia's economy - which was badly hit during the Fed tapering fallout in mid-2013 - to improve following the election of a fresh government last month.

The more 'business friendly' candidate Joko "Jokowi" Widodo was declared the winner of the July 9th Indonesian presidential elections. When he takes office for his five year term in October, he is expected to tackle some of the country's ongoing structural issues, such as poor infrastructure and deeply ingrained corruption.

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Markets have responded positively to the news of his win, and stocks are up 4.4 percent since the start of the election month on July 1.

But Daniel Martin, economist at Capital Economics, told CNBC it would be years before the economy sees growth levels of between 6-7 percent, as the dual headwinds of high interest rates and low commodity prices continue to weigh on the economy.

"The only thing that might be positive is Widodo's election, and we're not overly positive on his presidency. There's a lot of enthusiasm for him and a lot of people expect reforms, but until we see positive steps, we don't see growth levels returning to those higher levels over the next few years," he added.

Capital Economics forecasts Indonesia's economy to expand 5.1 percent year on year on Tuesday.

Contact World Economy

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