Source: Statistics Indonesia, Bahana

The 5.04 percent economic growth in the fourth quarter of 2015 beat expectations, as Bahana had put it at 4.78 percent yoy and the market consensus was 4.8 percent yoy. The full year gross domestic product (GDP) growth of 4.79 percent, however, was the lowest in six years. The performance in the fourth quarter of 2015 was helped by investments and government spending.

On a more negative note, private domestic consumption decelerated inthe fourth quarter of 2015 to 4.92 percent yoy (It was 4.96 percent the third quarter of 2015 and 5.11
percent in the fourth quarter of 2014), while net exports were up 78 percent yoy on lower imports amid low oil prices.

Overall, the biggest growth contributor remained private consumption, at 61 percent (59 percent in 2014), followed by investment at 37 percent (31 percent in 2014), government spending at 10 percent (2 percent in 2014) and net exports at minus 8 percent (8 percent in 2014). Details are as follows:

Government spending provided a lift to GDP growth in the fourth quarter of 2015, up 7.31 percent yoy and 41.3 percent quarter to quarter (6.56 percent in the third quarter of 2015, 0.87 percent in the fourth quarter of 2014) '€” this should provide some economic relief and could increase 7.1 percent yoy in 2016, mostly because of the low base effect from 2015.

Investment growth indicated some recovery with growth in dwellings (i.e. investment construction, including infrastructure projects) in the fourth quarter of 2015, which reached its highest level since 2012, at 8.21 percent yoy and 6.02 percent quarter to quarter. This we believe suggests investment recovery supported by government projects. The data indicated massive investments in infrastructure as illustrated in Table 3.

Source: Statistics Indonesia, Bahana

Roads and toll roads are being built for Medan-Kualanamu-Tebinggtinggi, Bakauheni-Terbagi Besar, Bawen-Salatiga, Pejagan-Pemalang, Bekasi-Cawang-Kampung Melayu, Cileduk-Blok M, Tanjung Selor-Tanjung Palas Kaltara and there is also the Jakarta MRT.

Electricity generating plants being constructed include the Borang Palembang gas-fired power plant, the Pesanggaran Bali diesel-fueled power plant, the Rawa Minyak and Rengat Riau gas-fired power plant, the Pama Central Kalimantan steam-driven power plant, the Tanjung Uncang Batam gas and steam power plant and the Gorontalo gas-fired power plant.

Other infrastructure includes dams in Lolak in North Sumatra, Akelamo in North Maluku, Raknamo in Kupang and Passellorang in South Sulawesi and Pidekso in Surakarta, the Gresik-Semarang gas pipeline, seaports in Sangatta, East Kalimantan, and Kuala Tanjung and Belawan, and the Kalibaru terminal at the Tanjung Priok port in North Jakarta, as well as office and apartment buildings in some provinces.

Private consumption was as subdued as we had expected at 4.92 percent yoy in the fourth quarter of 2015 (4.95 percent in third quarter of 2015, 5.11 percent in fourth quarter of 2014). All sectors experienced slowdown, except health and education (6.49 percent yoy; 6.41 percent yoy in the third quarter of 2015) and restaurants and hotels (5.46 percent yoy; 4.74 percent yoy in the third quarter). During the previous weakened economic cycle in 2009, domestic consumption recovery required full monetary policy support. This condition should also reduce the prospect of continued higher growth in the first quarter of this year as private consumption is equal to 55 to 58 percent of the total economy. As such, we expect further monetary easing ahead.

Source: Statistics Indonesia, Bahana

Support of net export growth stemmed from lower oil prices. Exports dropped 6.44 percent yoy while imports decreased 8.05 percent yoy. Net exports jumped 78.4 percent yoy, mostly supported by lower oil prices, as oil and gas imports dropped 13.07 percent yoy and non-oil and gas imports dropped 6.81 percent yoy. On the export front, oil and gas exports rose 11.55 percent while non-oil and gas exports fell 9.96 percent yoy.

By sector, 2015 GDP growth of 4.79 percent yoy was mainly supported by the information and communications industry, which grew 10.1 percent yoy. All sectors saw solid growth, except mining and quarrying, which decreased 5.1 percent yoy (0.6 percent yoy in 2014) because of lower commodities prices, especially for coal.

In the fourth quarter of 2015, insurance and financial services remained a catalyst, with 12.5 percent yoy growth (10.4 percent yoy in third quarter), followed by information and communications at 9.7 percent yoy. Mining and quarrying continued to contract, falling 7.9 percent yoy (5.7 percent yoy in third quarter of last year).

Contribution wise, the manufacturing sector only grew 4.2 percent in 2015 (4.6 percent in 2014), but remained the highest contributor of growth at 23 percent in 2015 while the construction sector'€™s contribution jumped to 16.1 percent in 2015, reflecting current ongoing government infrastructure projects.

Per capita GDP dropped to US$3,377, down 4.3 percent yoy (US$3,530 in 2014, $3,666 in 2013), as a result of slower growth and the depreciation of the rupiah. This reflects weaker overall purchasing power.

Going forward, even though we expect higher government expenditures in 2016 to lead to economic improvement, we believe the continued decline in private consumption would be a hurdle. Overall, we are more positive about the economic situation as government spending is showing some results.

Nevertheless, we expect slightly weaker GDP growth of between 4.9 and 5 percent in the first quarter of 2016 because of the seasonality of government spending. While historically government spending has not seen significant growth for three consecutive quarters, we believe general conditions indicate higher 2016 GDP growth.

Thus, we maintain our 2016 GDP forecast of 5.1 percent yoy. Marketwise, the current economic momentum and prospect of lower inflation ahead is making room for a further lowering of interest rates in BI'€™s next board of governors meeting, which should create positive sentiments in our view.

______________________________________

The writer is an analyst at Bahana Securities