GDP: Some silver lining amid current dark clouds

Arga Samudro
Research Department, Bahana Sekuritas

Following a downtrend since 2013, Indonesia’s 2Q14 GDP growth decelerated to 5.12% y-y (1Q14: 5.22%; 2Q13: 5.76%), its lowest level since 3Q09, and came in slightly below our and consensus estimates of 5.20% (exhibit 2). We attribute the slower 2Q14 GDP growth mainly to lower government expenditures.

Despite expected substantial domestic demand support from political-related activities and the advent of the fasting month, 2Q14 private consumption was relatively flat at 5.59% y-y (1Q14: +5.61%) shown on exhibit 3, while investment growth also slightly dropped to 4.53% y-y (1Q14: +5.14%).

Moreover, the government’s austerity program in 2Q14 also resulted in spending contraction of 0.71% y-y (1Q14: +3.58%).  Additionally, 2Q14 real exports also further contracted 1.04% y-y (1Q14: -0.44%) due to the unsound world economic recovery which was not fully backed by global demand.

On the industry side, transportation, electricity and retail trades were the main sectors which applied brakes on the 2Q14 GDP growth (exhibit 6).  

In the short-term, Indonesia’s economy should hinge on the government’s move on fuel subsidy reforms. Our sensitivity analysis reveals that if the government were to raise subsidized fuel prices by 1,000/liter in 3Q14, the CPI for 2014 would increase to around 7.9% y-y from our base of 5.9%, putting domestic demand at risk.

Under this scenario, our 2014 GDP target would go down to 5.05%, from our current forecast of 5.25%. The fuel-price hike could see our 2015 GDP growth decline to 5.37%, from 5.53% currently.    

On a brighter note, we see medium-term direct investment remaining resilient as Indonesia still presents an attractive consumer market led by a growing young middle-class population, providing incentives for investors to build plants close to the market place. Concurrently, a modest improvement in the US and other advanced economies could further provide a boost to manufacturing exports, leading to a recovery in trade balance going forward.  

Thus, we see some silver lining to bolster growth ahead despite current dark clouds in the form of possible price shock stemming from higher fuel prices.