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Analysis: GDP growth: Strongest in Southeast Asia

Helped by strong domestic demand and exports, Indonesia reported continued solid third-quarter gross domestic product (GDP) growth of 6

Harry Su (The Jakarta Post)
Thu, November 10, 2011

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Analysis:  GDP growth: Strongest in Southeast Asia

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elped by strong domestic demand and exports, Indonesia reported continued solid third-quarter gross domestic product (GDP) growth of 6.5 percent year-on-year, flat over the last two quarters and slightly lower than our and consensus estimates of 6.6 percent (exhibit 2). We note that growth across the board with exports, household consumption and fixed investment all showing good results.

The biggest contribution to GDP stemmed from exports, which expanded at the fastest pace since the first quarter of last year. While export support may weaken going forward on slowing global demand, Indonesia should remain as one of the best performing economies within the region next year, in our view. We note that Indonesia’s exposure to Europe is just 11 percent of total exports with most overseas demand coming from other Asian countries, where economic growth will remain resilient going forward.

By sector, the highest contributor to GDP growth came from hotels, trades and restaurants, which grew 10.1 percent year-on-year. This is followed by transportation and communications at 9.5 percent and services at 7.8 percent.

This year’s third-quarter household spending also remained robust, and should remain resilient in the coming quarters amid low inflation, low unemployment (exhibit 4) and low private-sector debt. The unemployment figure as of August 2011 reached 7.7 million people or 6.6 percent, down by 420,000 people compared to February 2011’s level, the lowest in a decade.

It is worthwhile noting that the strong performance of the Indonesian economy in the third quarter is in contrast to other economies which have published third-quarter data with Singapore, Korea and Taiwan all reporting weak figures. We expect this performance gap to remain through 2012.

We believe that the Indonesian government has ample room to loosen policy to support the country’s domestic demand. Low levels of government debt and a manageable fiscal deficit mean that spending could be significantly increased to help prop up export weakness ahead.

At this stage, we lower our 2011 GDP growth estimate to 6.5 percent from 6.6 percent previously. In 2012, with lower exports (i.e. less than 25 percent of GDP) and unexciting commodity prices, we expect GDP growth to slow slightly to the 6.4 percent level, still the highest in Southeast Asia. We note that domestic consumption accounts for 65 percent of GDP, shielding our economy from external volatilities.

Despite last month’s unexpected cut in the central bank’s benchmark rate to 6.5 percent, we believe Bank Indonesia could reduce its main policy rate further to bolster growth in the event of an economic deceleration. With October inflation at 4.4 percent year-on-year (Bahana’s 2011 forecast: 3.9 percent), down from 7 percent in January, BI could lower rates again at its next board meeting on Thursday. In aggregate, we expect a 50 basis-points interest rate cut to 6 percent between now and end of next year’s first quarter.

The writer is senior vice president and head of research at PT Bahana Securities

 

 


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