140206 indonesia economy to moderate, simona mocuta
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  • 1. Greetings, IHS Global Insight Asia Pacific Economist Simona Mocuta’s analysis and commentary on Indonesia’s slowing rate of growth in the coming quarters follows. Simona is based in Lexington, Massachusetts in the US (UTC -4:00hrs) and she may be reached at +1 781 301 9055 or by email Simona.Mocuta@ihs.com for additional comments or if you have questions. -0- Indonesia’s economic growth poised to moderate in coming quarters Ongoing risk aversion and delayed impact of monetary tightening expected to limit investment and consumer spending growth in 2014 6 February 2014 Simona Mocuta Senior Economist, Asia Pacific IHS Global Insight Despite ongoing financial market turbulence that pushed the rupiah exchange rate to above 12,000IDR/USD in December (a level not seen since the Global Financial Crisis), the Indonesian economy managed to accelerate slightly during the last three months of 2013. Real GDP grew by 5.7% year over year (y/y) in October-December, bringing the 2013 average to 5.8%, one tenth better than our forecast. However, the fourthquarter performance confounded universal expectations of a slowdown. This was the slowest weakest reading since 2009, but hardly a crash. What drove the strong Q4 performance? There were upside surprises in several areas, with exports, private consumption, and investment all quite robust. Export growth, in particular, accelerated considerably to 7.4% y/y, which was the strongest showing since the first quarter of 2012. It is quite possible that a last minute surge in mineral exports prior to export restrictions that took effect in January may have contributed to this. But there is much more to the story, given that Indonesia’s real exports growth has now accelerated for the fifth consecutive quarter. One particularly encouraging piece of data in the fourth-quarter release was the relatively stable pace of growth in investment. Real fixed investment spending was up 4.4% y/y in Q4, almost unchanged from the 4.5% pace of the prior six months. Fourth-quarter
  • 2. investment realization data from the Indonesian Investment Coordination Board had shown investment spending to have touched a new record high (in nominal, rupiah terms), so it wasn’t entirely surprising that trends in real investment spending were also pretty good. Nonetheless, given the convulsions in the Indonesian stock market since last May, it is worth noting that fixed investment trends point to a much more favorable picture of the country’s overall investment attractiveness. Import Substitution? One apparent contradiction in the fourth quarter data is that imports have slowed pretty much in line with our expectations, yet domestic demand has proven stronger. This suggests that imports are playing a lesser role in satisfying that domestic demand, perhaps because currency movements have encouraged buyers to shift from imports to domestic products (import substitution). It is hard to ascertain the degree to which this has occurred, but the current data, showing essentially every economic sector growing while imports are contracting, would seem to suggest that this is more than just a marginal phenomenon. Outlook & Implications The rate of growth is still poised to moderate in coming quarters due to ongoing risk aversion among foreign investors, on one hand, and delayed impact of monetary tightening, on the other. These forces are expected to limit investment and consumer spending growth. However, IHS is upping the 2014 growth forecast from 5.0% to 5.2% given evidence that domestic demand is still holding up quite well. The Q4 GDP data may embolden the central bank to hike interest rates again at the February 13 meeting. Even though recent incoming data is supportive of the rupiah (it indeed strengthened following the GDP release), the currency remains quite vulnerable to contagion effects and negative investor sentiment vis-à-vis EMs, particularly in an environment of more aggressive QE tapering by the Fed. Two data releases (foreign exchange reserves, on the 7th of February, and fourth-quarter balance of payments data due the day before the meeting) will offer valuable insight into pressures facing the rupiah, and will be critical in shaping the Bank’s final decision. -0-
  • 3. Danny Cheung Asia Pacific, Media Relations Asia Square Tower 1 8 Marina View, Singapore 018960 www.ihs.com Desk: +65 6439 6192 Mobile: +65 9171 3200 Fax: +65 6439 6001 danny.cheung@ihs.com  Please consider the environment before printing this e-mail. This email message is for the sole use of the intended recipient(s) and may contain confidential and privileged information. Any unauthorized review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please contact the sender by reply e-mail and destroy all copies of the original message. Thank you.