On the back of weak government expenditure, Indonesia'€™s gross domestic product (GDP) growth in the first quarter this year (Q1 2015) decelerated to 4.71 percent year-on-year (yoy), down 0.18 percent quarter-to-quarter (q-q) from 5.01 percent yoy in the fourth quarter of 2014 and 5.14 percent yoy in the first quarter of 2014. The Q1 2015 growth is the lowest level since the third quarter of 2009, and well below market expectations (table 1).

Government expenditure grew only 2.21 percent yoy in the first quarter this year (Q1 2014: 6.12 percent yoy), while private consumption grew just 4.53 percent yoy, remaining flat q-q.

Private consumption growth, the main economic growth contributor (58 percent of total Q1 2015 GDP), reached just 4.46 percent yoy during the first quarter this year as compared with 4.53 percent in Q4 2014 and 5.61 percent yoy in Q1 2014, as shown in table 2, mainly as a result of lower purchasing power on lower commodity prices coupled with rising fuel prices during the first quarter this year.

In line with our market findings, most sectors experienced deceleration (table 3), led by mining and quarrying (-2.32 percent yoy), which suffered from low commodity prices. This was followed by accommodation and F&B activities, which grew only 3.56 percent yoy, consistent with weakness in consumer companies. However, the telecommunications, insurance/financial services and real estate sectors bucked the trend, displaying yoy growth acceleration.

Although imports decelerated 2.20 percent yoy and paved the way for a trade surplus in the first quarter of 2015, external trade was not sufficient to support economic growth, as exports dropped 0.53 percent yoy on lower commodity prices and weak global demand.

Despite a slowdown in exports, weak government expenditure and a decline in private consumption, investment realization performed relatively well, expanding 4.36 percent yoy (Q1 2014: 4.66 percent) and providing some cushion for the economy. Investment reached Rp 125 trillion in the first quarter this year (24 percent of the 2015 full-year target), reflecting growth of 16.9 percent yoy and 3.5 percent q-q.

We think the weak GDP growth seen in Q1 2015 is likely to persist into Q2 2015. Recent Purchasing Managers Index (PMI) data point toward a weak manufacturing outlook, with a level of 46.7 in April, the seventh straight month of contraction. At this stage, we believe an economic rebound may occur in the third quarter at the earliest. We note that, based on data from the Public Works and Public Housing Ministry, only around 32 percent of infrastructure tenders were awarded over the last four months this year, far behind President Joko '€œJokowi'€ Widodo'€™s plan of finishing all tenders by March this year.

Given current slower-than-expected government projects, lower commodity prices and the relatively unexciting private consumption trend, we are of the view that the central bank may be forced to cut its benchmark rate by 25 basis points (bps) to 7.25 percent in the second quarter this year to support economic growth. (Bank Indonesia'€™s board of governors meetings will be held on May 19 and June 18).

As a result, we forecast 2015 GDP growth to reach 5.02 percent yoy (previous estimate: 5.29 percent), before improving to 5.28 percent yoy in 2016, although at a lower level than our previous estimate of 5.74 percent.

At this stage of the cycle, we believe the prospect of improved GDP growth will provide the equity market with much-needed support for improved performance, particularly on participation by foreign investors, which would help to prop up the rupiah despite lower interest rates.
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The writer is senior associate director/head of research at Bahana Securities