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Indonesia's economic growth surpassed expectations in the first quarter, driven by significant public spending for the country's elections.
However, maintaining this strong pace will be challenging due to global uncertainties and tight local monetary conditions. Southeast Asia's largest economy expanded by 5.11% year-on-year in the January-March period, marking its highest growth rate in three quarters. This growth exceeded the 5% rate expected by economists polled by Reuters and the 5.04% achieved in the fourth quarter.
Campaign expenditure for the February 14 election and increased household spending during the Muslim holy month of Ramadan, which began in March, contributed to economic activity in the first three months of 2024.
These factors helped offset the impact of declining commodity exports over the past year. Indonesia, known for being the world's biggest exporter of thermal coal, palm oil, and nickel, among other commodities, has faced challenges in this regard.
While the election and Ramadan spending provided a temporary boost, some economists view these as one-off factors.
Looking ahead, concerns loom over the impact of sustained high U.S. interest rates, tensions in the Middle East, and Indonesia's own cycle of interest rate hikes totaling 275 basis points from mid-2022 to April 2024. Gareth Leather, an economist at Capital Economics, predicts a challenging outlook for the economy, with full-year growth forecasted at 4.5%.
Recent rate hikes by Bank Indonesia (BI), including a surprise move last month to bolster the rupiah currency, which has fallen to four-year lows amid global market volatility, indicate a cautious approach by the central bank.
Radhika Rao, an economist at DBS Bank, believes the strong first-quarter growth data supports the view that BI will consider further tightening if the rupiah weakens further, aiming to maintain price and FX stability.
Government spending surged nearly 20% annually in the first quarter, compared to just 2.81% growth in the previous quarter, driven by higher spending on election and welfare programs.
Household spending also increased by 4.91% year-on-year, up from 4.47% in the previous quarter. Despite these positive indicators, investment growth declined to 3.79% in January-March from 5.02% in the fourth quarter.
Some government officials are optimistic about a potential rebound in investment following Defence Minister Prabowo Subianto's victory in the presidential election. Prabowo, who received support from President Joko Widodo during the campaign, is expected to continue the current economic policies when he assumes office in October.