140206 indonesia economy to moderate, simona mocuta
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
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
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
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
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.
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
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.
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