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Analysis: GDP growth: More acceleration expected to occur in second half, this year
In the last quarter of 2013, the Indonesian economy booked slightly accelerated economic growth of 5
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In the last quarter of 2013, the Indonesian economy booked slightly accelerated economic growth of 5.7 percent year-on-year (exhibit 1). Although this is up from 5.6 percent in the third quarter of 2013, we note that the country's economic growth remained below the 6 percent level for the third consecutive quarter thus far.
For 2013 as a whole, economic growth reached 5.8 percent, down compared to the 6.2 percent growth reported in 2012. Thus, despite the slight improvement in the fourth quarter of 2013, the below 6 percent growth achieved is well below Indonesia's historical standard. On the domestic economy, we observed a slowdown with private consumption, government spending and fixed investment all having expanded at a slower pace versus levels seen back in the third quarter of 2013.
Further scrutiny of the data reveals that net exports were an important economic growth contributor for Indonesia as export growth accelerated. On the flip side, imports decelerated, partly due to the government policy of curbing luxury imports as well as a weaker rupiah leading to higher prices of imported products.
Going forward, given that monetary policy is set to remain tight and commodity exports likely to suffer from a slowdown in the economies of China and India, growth is likely to remain muted, particularly in the first half of 2014. Nevertheless, we expect the decline in consumer purchasing power to be well cushioned, helped in part by an average 20 percent minimum-wage hike in 2014.
On the investment front, challenges in spending will stem from recent interest rate increases, lower commodity prices as well as policy uncertainties. Another drag on growth will arise from the government's target of reducing its budget deficit to just 1.7 percent of gross domestic product (GDP) this year from an estimated 2.3 percent of GDP in 2013.
However, we expect sentiment on investment to improve in the second half of 2014, particularly as we expect a smooth and successful presidential election outcome. Additionally, with Thailand's politics in turmoil and China's labor problems, we expect Indonesia to benefit from increased investment as companies relocate away from these two troubled nations.
On exports, while falling commodity prices will remain as a growth hurdle, we expect improved growth in the developed markets to provide some demand support for the country's manufactured exports, accounting for approximately one third of total exports. Nevertheless, we do not deny that demand pullback will materialize following diminished demand from both China and India.
Having said all of the above, at this stage of the cycle, we maintain our 2014 economic growth forecast at 5.3 percent, slightly lower than the consensus projection of 5.4 percent. In 2015, we forecast growth to reach 5.7 percent, also more conservative vis-Ã -vis the consensus figure of 6.0 percent.
On a brighter note, we think that there is an upside to our GDP growth figures, particularly if the central bank's tightening cycle in Indonesia is over, as we are currently still penciling in a 50 basis point hike in interest rates to take into account possible risk coming from uncertainties in emerging markets, which may reescalate into further financial turmoil forcing Bank Indonesia into implementation of more rate hikes in defense of the local currency.
The writer is senior associate director/head of research at PT Bahana Securities.
