Jakarta. Indonesia’s economic growth is likely to stagnate this year, warned the International Monetary Fund and global debt rating agency Fitch Ratings on Thursday.

The economy faces headwinds stemming from weaker regional growth, tightening global financial conditions, a weakened rupiah and narrow fiscal room — all while the government is left with limited options to stem the tide.

Indonesia’s gross domestic product expanded by 4.7 percent in the January to March period — its worst performance since 2009 — due to sluggish government spending and lower mining output. The country expanded 5 percent in 2014.

“My preliminary estimate is that, as a result of the weaker first quarter growth, Indonesia’s growth for the year will be somewhat lower from 5.2 [percent] to around 5 [percent],” said Kalpana Kochhar, IMF deputy director for the Asia and Pacific region.

IMF maintained a growth estimate of 5.2 percent for this year, and 5.5 percent for next in the “Asia and Pacific Regional Economic Outlook” report published Thursday.

Kalpana, however, noted that the report had not included the first quarter figures.

“Weaker-than-expected growth in China and Japan would have potentially sizeable spill-overs to the rest of the region,” said Kochhar.

China and Japan are among the biggest importers of Indonesian commodities and merchandise, buying a total of a fifth of Indonesia’s $33 billion non-oil and gas outbound shipments in the first quarter.

“Tightening global financial conditions and disruptive currency movements, possibly associated with asynchronous monetary policies in major advanced economies, could affect financial stability.

“This is particularly the case where leverage and foreign-exchange-denominated corporate debt is high,” Kochhar said.

Indonesia’s private sector external debt in February expanded 14 percent from the same month a year ago to $164.1 billion, accounting for more than a half of the country’s total external debt, data from Bank Indonesia, the central bank showed.

Indonesia has limited fiscal or monetary policy options to boost growth as the country needs to cope with lower-than-targeted government revenues and risks macro instability with further monetary loosening, Fitch Ratings said in a statement on Thursday.

“Lower-than-expected [first quarter] economic growth suggests full-year real GDP growth is likely to be closer to 5 percent, not 5.5 percent as we originally forecast,” the Fitch statement said.

“There is some room left for Indonesia to increase fiscal spending on infrastructure while remaining within the 3 percent of GDP fiscal rule, but that would be limited as low commodity prices reduce government revenue,” Fitch said.

Tax revenue collection fell short of the government’s target for the first four months of 2015, as weak oil prices and lower retail receipts signal an economic slowdown which may have stretched into the second quarter.

The government received Rp 310 trillion ($23 billion) from January to April, or 24 percent of its target for the full year, the Finance Ministry’s tax office said in a statement on its website on Wednesday.

That was 1.3 percent lower than the same period last year.

“Fiscal policy loosening, while still abiding to that fiscal rule, would not have a negative impact on Indonesia’s rating profile.

“At the same time, questions remain over the government’s capacity and ability to spend the already planned [capital expenditure], let alone above the current target,” the ratings agency said.

Indonesia should prioritize economic stability over higher real GDP growth to maintaining its investment grade rating, which has helped attract investment to the country, the rating agency said.

Fitch and Moody’s Investors Services upgraded Indonesian debt to investment grade three years ago, while Standard and Poor’s maintain the debt’s junk status.

Bank Indonesia’s tight monetary policy has helped stave off the effects of the US Federal Reserve’s tapering, but further monetary easing risks higher inflation and further weakening of the rupiah.

“Indonesia remains more vulnerable to external-account destabilization than some regional peers such as India and the Philippines; notably, its current account has not narrowed significantly and remains at close to 3 percent of GDP,” Fitch said.

Still, Vice President Jusuf Kalla on Thursday predicted that Indonesia’s economy would rebound to grow at more than 5 percent in the second quarter on the back of increased infrastructure spending.

“The projects will happen in the second quarter. As the projects start, cement prices will go up, and people will have more jobs,” he told reporters at the sidelines of the 2015 Institute International Finance Summit event in Jakarta.

“It will take time to reach [the growth target], but there will be government and public spending,” he said.

GlobeAsia with additional reporting from Reuters

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