Jakarta. Indonesia's manufacturing sector slipped back into contraction in June as weaker domestic and export demand combined with rising production costs, although the government expects recent policy measures to help restore growth in the coming months.

Indonesia's Purchasing Managers' Index (PMI) fell to 46.9 in June from 50.0 in May, according to S&P Global, dropping below the 50-point threshold that separates expansion from contraction.

The Industry Ministry said the decline reflected softer orders from both domestic and overseas markets, prompting manufacturers to cut production, reduce purchases of raw materials and slow hiring.

Manufacturers also faced mounting cost pressures as imported raw materials became more expensive following the rupiah's depreciation. According to S&P Global's survey, input price inflation reached its second-highest level since the PMI survey began in 2011.

"We should view this as a challenge that must be addressed by strengthening policies to improve the competitiveness of Indonesia's manufacturing sector," Industry Ministry spokesman Febri Hendri Antoni Arief said on Wednesday.

The ministry said reviving manufacturing activity will depend on reducing production costs while supporting demand through a range of industrial policies.

One of the government's key measures is expanding the Certain Natural Gas Price (HGBT) program, which provides manufacturers with discounted natural gas prices to lower energy costs.

Earlier this week, the government cut the price of regasified liquefied natural gas (LNG) supplied to industrial users to US$13 per million British thermal units (MMBtu) from around US$20–23 per MMBtu.

Officials said the move would improve manufacturers' competitiveness, reduce operating costs and help prevent layoffs.

"The reduction in industrial LNG gas prices is positive news for manufacturers and could help return the manufacturing PMI to expansion in the coming months," Febri said.

Beyond energy costs, the ministry said protecting domestic industries has become increasingly important amid intensifying global competition.

The government plans to strengthen local manufacturing through wider use of domestically produced goods, investment incentives, measures to protect the domestic market from unfair trade practices and efforts to expand exports into non-traditional markets.

Despite June's contraction, the ministry saidthat business confidence improved. S&P Global's survey showed manufacturers were more optimistic about business conditions over the next 12 months, supported by expectations that inflationary pressures would ease and demand would gradually recover.

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