· Real GDP growth in 2Q12 came up stronger at 6.37%yoy (2.80%qoq), significantly higher than consensus and our forecasts. Poor performance of exports, amid stronger imports, of goods and services can apparently still be more than offset by stronger pace in domestic demand. The statistics office also revised up the 1Q12 GDP growth to 6.32%yoy, which mainly caused by an upward revision in the agriculture sector. Meanwhile, in a separate publication earlier released on Wednesday 1 August, a quite sharp downward revision in the manufacturing production (large, medium and small/micro) in 4Q11 and 1Q12 was not reflected in the GDP data at all, thus causing most growth projections to be understated.
· On quarterly basis, GDP growth of 2.80% was mainly driven by investment which grew relatively strong at 6.31%qoq (12.31%yoy). This is also reflected in the strong growth of the construction sector (4.43%qoq or 7.26%yoy) despite relatively lower cement sales. Furthermore, the investment realization data from the BKPM was very encouraging, foreign investment recorded a quite high growth of 30%yoy while domestic investment rose relatively more modest at 10%yoy. Strong foreign investment was also a mirror of high imports of capital goods, which grew by 30% in the 2Q12. This shows that fundamentally, Indonesia remains attractive despite the global slowdown. Domestic consumptions also continue to be strong and resilient, growing by 4.99%yoy (1.37%qoq). Inflation expectations remain contained with the much slimmer chance of subsidized fuel price hike.
· Government spending was also in a faster pace than the previous quarter, growing by 7%yoy or 27.2%qoq. This is in line with the budget spending realization data, released by the ministry of finance that showed a relatively better result. Spending realization in the first semester shows a significant rise (40.7% compare to last year of 33.5%). Looks like it is also a factor of several regulatory and procedural changes in the government spending and procurements processes, including the reward and punishment mechanism that have brought about positive realization result.
· Despite pressure on the external demand side, export still recorded a positive growth by 1.3%qoq (1.9%yoy). This is possibly due to the dominating decline in global commodity prices in the slowdown of exports, while the exports volume growth is still a small positive. Imports on the other hand recorded a higher growth of 9.2%qoq or 10.9%yoy).
· From the production side, main drivers are still in the tertiary sector that is also the biggest contribution to the economic growth. Trade, hotels and restaurants was up by 5.2%yoy. Primary sector growth was relatively modest compared to the previous quarter, except for the mining & quarrying sector that consistently showed a quarterly contraction of 0.6%. The drop was contributed by the mining sector while the quarrying sector was still positive.
Manufacturing sector performance recorded slightly lower growth, at 2.7%qoq or 5.4%yoy, which may have been also affected by slowing external demand. The traditional sector of textile, garment and footwear performed better, while food, beverages and tobacco industries showing a slowdown. Despite the upcoming implementation of LTV and DP regulations, automotive and machineries industries performed much better at 11.74%yoy vs. 6.23%yoy in the previous quarter.
Possible Policy and Market Implications
· In conclusion, despite the global downturn, Indonesia’s economic growth remains robust, and driven by strong domestic demand, reflecting a high level of imports and investment. Meanwhile, the significant deterioration of the net exports values of goods and services (in nominal terms) may also be reflected in the relatively poorer performance of the balance of payment data that is scheduled to be released later this week.
Bigger current account deficit and may also be accompanied by a very small capital & financial account deficits, as foreign exchange reserves was down by almost US$ 4bn in 2Q12. The deficit in Current Account (CA) should not create a big problem since it was a logical consequence of higher growth driven by domestic demand.
However, this raised a question of a possible overheating in the economy, although we still have not seen general signs of overheating on a few reasons. Supply side still responds relatively well, as the investment growth can still increase the production capacity. This is indicated by a broader based growth of FDI. Foreign investment currently was not centered in just the mining sector only, but has also spread into the manufacturing sector.
On the demand side, imports are dominated by raw material (a big portion is in the form of fuel) and capital goods which are positive for the economy. Furthermore, we expect to see a slowing pace of imports, particularly in consumption and raw material. Inflation also remains contained, as thus far we have not seen any significant imported inflation pass through. Therefore, with respect to this, we think BI will still maintain the policy rate (BI rate) at 5.75% in August-12, balancing the risks of external balance and growth, with lesser emphasis on growth, in the next few quarters.
· An orderly adjustment of balance of payment is still very likely to happen, though the situation may create pressure on the exchange rate. Thus, we are counting on the policy measures taken by BI to maintain liquidity in the market to reduce the pressure on the currency.
BI may issue a relaxation on the forward transaction shortly as an attempt of deepening the financial market and increasing the onshore foreign exchange liquidity. We maintain our views that the IDR/USD may move towards 9,200 at year-end (2012) but with some “downside risk”. This downside risk (weakening of the rupiah) hinges primarily upon the perceptions of investors on the BoP and economic stability.
*) The writers are Economist and Econometrician, Treasury & Capital Markets PT. Bank Danamon, Tbk.