Analysis: GDP growth: The good and the bad

Supported by an increase in the private consumption by 4.9 percent year-on-year (y-y), government spending (+2.8% y-y) and direct investments (+11.5% y-y), Indonesia’s GDP growth of 6.5 percent y-y in the fourth quarter, 2011 (4Q11) (exhibit 1), relatively flat q-q, brought full year 2011 GDP growth to 6.5 percent, in line with our estimate and reaching the highest level since the 1998 Asian financial crisis.

On the export front, 4Q11 growth slowed to 7.9 percent y-y (exhibit 1), down from 18.5 percent y-y in 3Q11, adversely impacted by global economic slowdown which deteriorated external demand.

4Q110 imports also declined to 10.2 percent y-y compared from 3Q11 level of 14.2 percent y-y, indicating that domestic demand for imported raw materials also decreased in anticipation of slower economic growth ahead. We note that imported capital goods and raw materials accounted for around 92 percent of our total imports.

By industry, support from government budget disbursement in the last quarter of 2011 paved the way for construction, electricity, gas and water supplies to be the main growth drivers in 4Q11 (exhibit 2).

With the government’s subsidized fuel limitation program in April likely to be postponed, there are talks of the government raising the actual subsidized fuel price, which is already ahead of the government’s target of US$90/bbl (exhibit 3).

Based on the government’s historical track record, we believe subsidized oil price will remain, particularly given falling popularity of Democratic Party (Partai Demokrat).

However, should oil prices are increased, 2012 inflation would rise from our current base case of 5.24 percent to 6.13 percent with every Rp 500/liter hike in subsidized oil price (direct and indirect impact).

In this scenario, higher inflation will lead to lower purchasing power, eroding Indonesia’s domestic demand and resulting in lower GDP growth to 6.15 percent from our current base case of 6.4 percent.

Additionally, we note that on the external trade, we expect slower exports this year already on continued global uncertainties. It is worth mentioning that the International Monetary Fund (IMF) has cut 2012 global GDP growth to 3.3 percent from 4.0 percent with Indonesia’s growth coming down to 6.1 percent from 6.5 percent.

However, this could be somewhat offset by Indonesia’s higher sovereign debt rating to the investment grade, allowing for strong direct investment flows coming from both domestic and overseas investors. Coupled with manageable inflation as the government would not likely to raise subsidized fuel prices, we believe 2012 GDP growth will reach 6.4 percent, remaining resilient, providing shelter for investors from the current global economic slowdown.