2015 GDP growth: Fuel price hostage

Arga Samudro
Research Department, Bahana Sekuritas

On the back of sluggish export performance, Indonesia’s 3Q14 GDP growth continued to decelerate to 5.01 percent y-y, (2Q14: 5.12 percent y-y; 3Q14: 2.96 percent q-q), its lowest level since 3Q09, coming in below our and consensus expectations (exhibit 2).
Amid austerity program implemented in 2Q14, government expenditure realization bounced back in 3Q14, reaching 4.37 percent y-y (2Q14: down 0.71 percent) supported by material spending which usually starts in 2H. On the flip side, 3Q14 private consumption growth was slightly down at 5.44 percent y-y (2Q14: up 5.59 percent) as shown in exhibit 3, despite domestic demand effects from political-related activities, fasting month and Lebaran festivities.

Additionally, while 3Q14 direct investment realization recorded by the Investment Coordinating Board (BKPM) reached a new record high, investment component of the GDP growth dropped to 4.02 percent y-y (2Q14: up 4.53 percent). On the external front, fragile global economic recovery resulted in 3Q14 real export growth of only 0.70 percent y-y (2Q14: down 0.76 percent), while imports remained weak, reaching -3.63 percent y-y (2Q14: down 5.05 percent).

On the industry side, manufacturing, transportation-telecommunication, construction, retail trades and financial business were the main sectors behind the lower 3Q14 GDP growth (exhibit 6).    
In the short-term, we are of the view that 4Q14 GDP will hinge on the government’s plan to raise fuel prices in November; however, there has been no indication on the magnitude of the hike. Assuming IDR2,000/l fuel price hike, we expect lower purchasing power would lower 4Q14 GDP growth to below the 5 percent y-y level (exhibit 5). At this stage, we have lowered down our 2014 full-year GDP growth target to 5.12% from 5.2%. Additionally, we have also slightly cut 2015 GDP growth estimate from 5.1% to 5.08%.

In addition, our sensitivity analysis reveals that given the same scenario, low level of 4Q14 GDP would translate to 2014 full-year level of 5.08 percent from our new baseline level of 5.12 percent. Furthermore, coupled with relatively weak exports, we believe 2015 GDP growth could fall to 5.02 percent, lower than our baseline level of 5.08 percent (exhibit 4). We will review our GDP growth targets once the government announces its planned price hike implementation.