Economics Indonesia chart book Consumption trumps weak trade Group Research 7 August 2018 Radhika Rao Economist Please direct distribution queries to Violet Lee +65 68785281 violetleeyh@dbs.com 2Q GDP growth registered an upside surprise, rising 5.3% YoY vs 1Q s 5.1% and fastest since 4Q13. The 1H trend is tracking slightly above our full-year growth forecast. Government spending rose ahead of elections, accompanied by modestly better private consumption. The latter received a hand from festive demand, harvests and a benign inflation outlook. Investment growth eased in 2Q, but this pullback is unlikely to persist as public-sector capex projects are underway and capacity utilisation rates improve. Contribution of net trade was in red for the third consecutive quarter. For 2H, household demand and government spending are likely to remain supportive, with a tighter policy regime to be a dampener at the margin. External trade will remain a counter-weight. From a 3.3% YoY in January-July, inflation is likely to average 3.6% this year on higher food costs, while an extension of energy subsidies contains cost-push pressures. The Bank Indonesia is unlikely to lower its guard against global developments. With stronger 2Q growth on hand, we expect another 50bp hikes in 2H (the next hike likely in August). Rupiah stability remains a priority. GDP headline and breakdown GDP breakdown Refer to important disclosures at the end of this report.
Growth The Indonesian economy expanded 5.2% YoY in first half of 2018. Notably, the 4Q moving average contribution of fixed investments, particularly dwellings and machinery/ equipment, is closing in on household consumption. Consumer confidence and retail sales survey are looking up, lifted also by the mid-year festive period and benign inflation. These are yet to translate into a pick-up in real consumption trends. Investments have surpassed headline growth for four quarters, with the softer 2Q growth unlikely to last. The imports-intensive nature of investments has led to a sharp rise in capital and intermediate imports, underscoring the importance of rupiah stability. The transition from a commodity-led growth to manufacturing is still a work in progress. The sectors share as a percentage of GDP has been moderating in the recent years. Page 2
External trade Indonesia s non-oil and gas exports are showing signs of an improvement, while O&G benefits to a smaller extent despite the recent rebound in global prices. The net O&G trade balance remains under pressure. China s share in Indonesia s exports is nearly steady, while the share of South and South East Asia is rising. Any fallout on the regional supply chain could deal secondround effects on Indonesia. A surge in investments growth is mirrored by higher capital goods imports. The authorities plan to review imports for big government projects to contain CAD pressures. The trade balance has weakened in 2018 yet far, with YTD gap at USD1bn deficit vs 2017 s USD11.8bn surplus. Despite better exports, a surge in imports has played a bigger hand in deteriorating the trade gap. Page 3
Inflation Indonesia s headline and core inflation are wellcontained, falling within the central bank s 2.5-4.5% target. The festive bounce in June-July was evident in sequential trends and food prices (volatile items). Food and fuel carry the highest weightage in the CPI basket. The latter is most volatile/swing factor in recent years, but trends are benign, yet far, as administrative controls will cap domestic fuel prices until next year. Under non-core segment, inflationary pressures are evident from volatile foods but is being overshadowed by administered price inflation as domestic fuel and electricity subsidies stand extended. Price expectations are diverging. Survey respondents expect price pressures to be benign over the next 3 months, but the 6-month gauge reflects a bounce likely on higher oil and expectations of a recovery in demand. Page 4
Capital flows and Monetary Policy The central bank put up a strong defence against rupiah depreciation. As a result, foreign reserves moderated from USD131bn in January to USD120bn in June 2018. Despite dollar purchases, rupiah is down 6% this year. Apart from a weaker IDR vs USD, rupiah has also weakened on NEER basis i.e. against its trading partners. While this bodes well for trade competitiveness, the trend showed signs of a reversal in June. The basic BOP (i.e. current account balance plus net FDI), which signals the financing ability, is set into slip back into small deficit this year. But the quantum of slippage is far more contained than in 2012-2013. Bank Indonesia, under the new Governor, has taken a pre-emptive approach in containing volatility and limited rupiah depreciation. Domestic inflation risks are contained but global uncertainties and US rate hikes, leave the door open for 50bp more hikes by year-end. Page 5
Forecasts on major indicators GDP (YoY) CPI inflation (YoY) 2016 2017 2018f 2019f 2016 2017 2018f 2019f Annual change (%) 5.0 5.1 5.0 5.2 3.5 3.8 3.6 4.0 Exchange rate and interest rates forecasts 1Q18 2Q18 3Q18f 4Q18f 1Q19f 2Q19f 3Q19f 4Q19f USD/IDR eop 13728 14330 14500 14600 14650 14700 14750 14800 BI rate (%, eop) 4.25 4.75 5.50 5.75 5.75 5.75 5.75 5.75 Government bond yields 2Y (%, eop) 5.5 7.6 6.9 7.1 7.2 7.3 7.4 7.5 10Y (%, eop) 6.7 7.8 7.3 7.4 7.55 7.7 7.9 8.0 10Y-2Y (bps) 117 22 40 30 35 40 45 50 Page 6
Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G3 & Asia +65 6878-9548 taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong +852 3668-5693 nathanchow@dbs.com Joanne Goh Regional equity strategist +65 6878-5233 joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist +65 6878-2072 neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia +65 6878-2842 eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong +852 3668-5694 chrisleung@dbs.com Radhika Rao Economist - Eurozone & India +65 6878-5282 radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam +65 6878-6727 irvinseah@dbs.com Duncan Tan FX & Rates Strategist - ASEAN +65 6878-2140 duncantan@dbs.com Samuel Tse Economist - China & Hong Kong +852 3668-5694 samueltse@dbs.com Philip Wee FX Strategist - G3 & Asia +65 6878-4033 philipwee@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan +65 6878-2408 matieying@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further c ommunication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. Page 7