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entral Statistics Agency (BPS) reported Monday Indonesia's year-on-year GDP growth reached 4.21 percent, higher than that of the second quarter of 2009, which was 3.99 percent, and higher than the market consensus of 4.17 percent.

On a quarter- to-quarter basis, the country's economic growth was 3.9 percent, higher than the 2.4 percent growth reported in Q2. In aggregate, the Q3 year-to-date economic growth reached 4.2 percent y-y, versus the 6.4 percent level in the same period of 2008.

Similar to last quarter, the external sector was still the main drag on GDP with exports and imports having posted -8.2 percent y-y and -18.3 percent y-y respectively.

It is worth pointing out that Indonesia q-q export performance, supported by the recovery on most advanced countries and China, posted 8.6 percent growth, better than the 7.4 percent growth in Q2.

We expect that the positive q-q trend would continue as the support from global economic performances has been getting stronger.

From the latest data, three countries (China, the US, and Singapore) have reported improving figures for their Q3 economic performance. China posted an 8.9 percent y-y improvement compared to *only' 7.9 percent in the previous quarter, while the US economy continued to contract by 2.3 percent or better than the previous -3.8 percent.

Moreover, Singapore posted a sharp y-y GDP growth, from a 3.5 percent contraction to 0.8 percent expansion. It is worth noting that these three countries were Indonesia's main trading partners, contributing 30 percent of total Indonesian non-oil and gas export value.

Stronger global economic performances coupled with continued G20 fiscal stimulus would boost optimism and commodity prices, benefiting Indonesian external trade.

Now, how about the traditional factors that always drive Indonesian economic performance: private consumption and government spending? As we expected, government and private spending (domestic factors) remained the backbone of the Indonesian economy, contributing 10.2 percent y-y and 4.7 percent y-y.

This was mainly helped by spending during the fasting month and Idul Fitri festivities in September. It is worth pointing out that national election-related spending was no longer present in Q3.

In our view, Indonesia had different stories on the factors that supported private spending growth during 2009, such as the election-related spending that supported private spending in the first half of 2009 while seasonal factors (Idul Fitri festivities and massive government's infrastructure-related projects) would mainly support private and government spending in H2.

Furthermore, positive domestic indicators such as the subdued 2.48 percent ytd inflation rate and BI rate which has been kept at a low 6.5 percent would also be considered as another positive factor.

Moreover, investment figure posted a 4.0 percent rebound y-y after dropping to 2.7 percent y-y in Q2, the slowest growth since Q3 of 2006. Furthermore, investment also displayed an improvement of 6.5 percent in quarter-to-quarter growth, compared to the slow 2.4% percent expansion reported in Q2.

We believe that higher bank lending disbursement in H2 coupled with further improvement in economic performance would pave the way for 4.4 percent investment growth, bringing the full-year 2009 investment growth rate of 3.7 percent y-y.

By industry, non-tradable sectors, such as transportation and communication sectors still contributed most towards Q3 GDP with 18.25 percent y-y growth followed by 14.6 percent growth in government utilities (i.e. electricity, gas and water sectors).

Additionally, we also saw some improvements in both the manufacturing industry as well as the mining sector as they respectively booked positive q-q figures of 2.8 percent and 5.1 percent compared to 1.4 percent and 0.8 percent in Q2.

Going forward, we expect that the government's utility and transportation sectors would play more important roles in supporting the GDP growth as government projects began to intensify at end-Q2.

In sum, we believed that the economy would still be resilient in until end 2009 in line with the recovery in Indonesia main trading partners and that the market has priced-in good news related to this Q3 and year-end GDP growth.

Thus, the potential upside in the market would likely come from the foreign inflow. In the bond market, fluctuations were caused by foreign inflows rising Rp 1.1 trillion to Rp 102 trillion as of Nov. 6. from end Oct

However, we noted the biggest macro risk would be higher inflation, to 6.58 percent next year, on higher electricity tariffs, LPG and possibly gasoline prices while 2009 demand-pull inflation (due to Christmas and New Year holidays) would only affect December.

Hence, we expect the role of government would escalate in the up coming months to maintain economic performance, such as in accelerating budget disbursement and maintaining the consumer's purchasing power through job-creation government projects.

Given domestic political and social stability, our end-2009 economic growth rate of 4.1 percent would rise to 5.2 percent in 2010 as expected.