The Jakarta Post
Indonesia's economy approaches the end of the first half of the year with several doubts still lingering among investors whether the economy will rebound or stay flat this year. Looking back to what we saw in the first quarter of the year when the economy grew 4.7 percent year on year (yoy), lower than expected, the doubts are reasonable.
Despite many countries also experiencing a downward trend since last year, Indonesia's economy was expected to do much better since the beginning of the year due to better investment and government spending being capitalized in the first quarter. One of the reasons was because we had a new government and a new spirit to speed up domestic development.
Let's first take a look at what we had in the first quarter of 2015 (Q1 2015); as mentioned, first quarter real GDP growth of 4.71 percent yoy was slower than the 5.01 percent yoy in the previous quarter and was in fact the slowest since Q3 2009. It was lower than our forecast of 4.83 percent yoy and even more so than the consensus of 4.94 percent yoy.
The slowdown was mainly driven by the weak global environment as reflected in sluggish commodity prices and delays in budget disbursements due to the budget revision process. Government spending growth eased to 2.21 percent yoy in Q1 2015 from 2.83 percent yoy in Q4 2014.
The realization of government spending in Q1 2015 was still low, reaching only 14.9 percent or relatively similar to Q1 2014, which reached 12.9 percent. In fact, the realization of the capital expenditure only reached 1.4 percent down from the Q1 2014 performance, which reached 4.9 percent. The lower spending realization was of course understandable since the government still had to revise the 2015 budget at the beginning of the year to support their development targets.
Surprisingly, the backbone of the economy, consumer spending still posted a strong figure despite the deceleration in cement, auto and property sales in the first quarter. The contribution of consumer spending to the Indonesian economy has remained relatively constant at between 2.8 percent and 3.0 percent since 2011, unlike the drop in the investment contribution to the Indonesian economy, which currently only amounts to 1.3 percent as opposed to 2.7 percent in 2011.
On the production side, most sectors posted flat-to-lower growth. The biggest concern, as widely predicted, was the mining sector or more specifically the coal sector. It contracted 2.32 percent yoy in Q1 2015 from 2.22 percent yoy in Q4 2014, the only sector that experienced a contraction. The mining sector will most likely experience another contraction in the upcoming period due to China's gloomy economy and lower commodity prices.
Going forward, the million-dollar question is whether the economy will really rebound or stay flat or even get worse. We are still of the view that an economic rebound will happen in the upcoming quarters. One of the big keys is the acceleration of government spending and the promises and deliverables. All in all, we think economic growth will pick up in Q2 2015 on the back of government expenditure. Low capital expenditure realization in Q1 2015 could somewhat be tolerated as the revised budget was approved in mid-Feb. 15.
Given several improved macroeconomic indicators this year, such as an inflation rate that is expected to be 4.5 percent and current account deficit that could probably reach 2.7 percent, the government has the capital to boost the economy and restore investors' confidence in the Indonesian economy. We believe that the sign of any improvement in government spending in Q2 2015 will drive investment coming to Indonesia to support infrastructure projects. Having said that the key is not to look for results of better infrastructure in only one year, but rather to look at better spending allocations in a timely manner. We believe that infrastructure in Indonesia is not a one-year challenge but a continuing challenge over decades to narrow the development gap with other emerging countries and to avoid the 'middle income trap'.
Another big key is structural reform in Indonesian industry to support the export performance amid slowing raw-commodity based exports. The down-streaming of commodity-based manufacturers should be supported by several incentives and sufficient infrastructure, such as roads, ports and electricity. Strong manufacturing industries could help Indonesia's economy going forward when the ASEAN Economic Community starts to be implemented, as well as avoiding a huge dependency on raw material exports.
At this point, we believe that the government is aware of these economic challenges, will mitigate the risks and formulate solutions. Hence, we will wait for better figures in Q2 2015 before the economy further accelerates in H2 2015. Up to now, considering small project tender processes and infrastructure maintenance have begun, project realization may have kicked off entering Q2 2015. We believe the bigger push on growth will come in H2 2015 owing to the start of big infrastructure projects realization such as toll roads and power plants, coupled with looser monetary conditions.
In sum, we expect that the economy will achieve growth of 5.3 percent this year. However, due to several downside risks on the economy especially on the government's financing risk that could affect capital spending, we still see a probability that economic growth could fall below our target. In addition to that, the Q1 2015 performance of 4.7 percent growth will actually make the government work even harder in the remaining quarters to reach their growth target of 5.7 percent.
The writer is a senior economist at Bank Mandiri
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