Can Indonesia's economy catch a break?

Indonesia choosing stability over growth: Pro

Southeast Asia's largest economy is likely to remain in the doldrums this year, but could rebound in the final quarter, economists told CNBC.

The past 12 months have been challenging for Indonesia after the fallout from the Federal Reserve tapering its bond-purchase program last year prompted a mass exodus from emerging market assets. Indonesia was classified as one of the 'fragile five' economies most exposed to tapering pain.

"We see little hope for an imminent turnaround," said Daniel Martin, Asia economist at Capital Economics.

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"We think that tight monetary policy, along with weak demand for commodity exports, will prevent a bounce-back to the 6 percent-plus growth rates that not long ago looked like the norm," he added.

Indonesia's central bank has hiked interest rates five times since mid-2013 as it desperately tried to prop up its flailing currency, which dropped 26 percent against the U.S. dollar in 2013.

Furthermore, political uncertainty surrounding elections this year combined with a controversial mineral export ban have also proven headwinds to investment and growth.

Tuk-tuk (Bajaj), Jakarta, Indonesia, Southeast Asia, Asia
Rod Porteous | Robert Harding World Imagery | Getty Images

First-quarter growth came in at 5.2 percent on Monday, missing analyst expectations for 5.6 percent growth and dipping well below the previous quarter's 5.7 percent growth rate. It was the slowest growth rate the economy has seen since the third quarter of 2009.

Investment in the first quarter grew 14.6 percent on year, data showed in late April, much slower than 27 percent growth seen in the first quarter of 2013.

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Capital Economics' Martin said investment growth is likely to remain weak due to a combination of high interest rates and lackluster commodity demand.

He added that dwindling hopes for political reform following a poor performance from Joko Widodo's party in the parliamentary elections also added to bearish sentiment.

Widodo, who is the current governor of Jakarta and is widely known as Jokowi, is believed to be the presidential favorite. But if Widodo doesn't garner enough votes, he may need to form a coalition with another party, which could limit the ability to push through reforms.

But according to Wai Ho Leong, senior regional economist at Barclays, the dip in Indonesia's growth rate on Monday was likely to be temporary.

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"I'm not at all concerned about the outlook. I think Monday's slowing has been due to temporary disruptions in the first quarter," he said.

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"If you recap in January and February we saw the worst floods Indonesia has seen for some time...That's why we had both exports and imports contracting not because people are not ordering but because the road traffic and freight is disrupted," he added.

Leong added that the mineral ore export ban - which was implemented in January designed to boost profits from its mineral sector by forcing miners to process ore at home - had little impact on Indonesian growth.

"Certainly monetary tightening has contributed to the weakness. I'm not sure if the mineral export ban is a key driver of growth because it's not applicable across all minerals," he said, adding that the country's strong export recovery in March demonstrated that the ban had little impact.

Leong expects headline gross domestic product growth to bottom at 5 percent in the second and third quarters, and to recover to 5.4 percent in the final quarter, logging a 5.3 percent growth rate for the year overall.

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Capital Economics' Martin added that there was a bright spot for the Indonesia economy in the form of consumer spending.

"Inflation should fall back sharply from July as the impact of last year's fuel price hike drops out of the annual comparison. Lower inflation should boost consumers' purchasing power. Buoyant consumer confidence will also help," he added.