Indonesia 2014 growth slowest in 5 years, but govt spending may fuel pick up

By Adriana Nina Kusuma and Nilufar Rizki

JAKARTA (Reuters) - Indonesia's economic growth slipped to its weakest in five years in 2014 as weak exports and investments dragged, underlining the challenges facing the country's new President Joko Widodo.

Southeast Asia's largest economy is finding it harder to fire up its engines of growth with the ending of the commodities boom and as high interest rates weigh on domestic demand.

Exports of primary commodities such as coal and rubber fell last year, as growth slowed in large markets, notably China, while a mineral export ban hit copper and nickel ore shipments. Oil and gas exports also fell.

Gross domestic product expanded 5.02 percent for the full year, slower than growth of 5.58 percent in 2013. In the fourth quarter, the economy grew a slightly better than forecast 5.01 percent from a year earlier, but contracted 2.06 percent against the third quarter, on a seasonally unadjusted basis.

"Today's disappointing figures, which were broadly in line with consensus, help to underline the challenge facing the country's new president, Joko Widodo, who despite a promising first few months in office faces a tough challenge to reinvigorate the economy," said Gareth Leather from Capital Economics.

President Widodo wants to raise growth to 5.6-5.8 percent this year, and attain 7 percent growth on average in his five-year tenure, based on higher investment and government spending.

That would mean spurring investment, which grew more weakly than historical trends in 2014, partly due to investors' wait-and-see mode in an election year.

A rebound in growth, however, would depend on government efficacy in delivering on infrastructure projects in the pipeline, analysts said. Growth may also revive slower than Widodo's target due to weak commodity prices and high interest rates.

Widodo has set up a government agency to serve as a one stop service for investment licences to make things easier for investors and will use the fiscal windfall from removing gasoline subsidies to improve the country's creaky infrastructure.

Despite slower inflation in January, Bank Indonesia has been reluctant to cut its main interest rate to support growth because of concerns that it might trigger capital outflows and weaken the currency.

"We have a wide current account deficit and that's the reason why Bank Indonesia still keeps a tight policy," said David Sumual, chief ecnomist at Jakarta-based Bank Central Asia, adding there was a possibility of a rate cut this year.

The rupiah eased to 12,645 per dollar and the share index dropped 0.80 percent in afternoon trade.

(Additional reporting by Fransiska Nangoy, Nicholas Owen, and Gayatri Suroyo in Jakarta, Jongwoo Cheon in Singapore; Writing by Gayatri Suroyo; Editing by Jacqueline Wong)