Will Indonesia be a regional outperformer in H2 of 2016?

SINGAPORE - A better-than-expected Q2 GDP print foreshadows what ANZ Bank expects to be Indonesia’s ascent to be one of the outperforming economies in ASEAN, especially after what it calls “fortuitously engineering a positive feedback loop between monetary and fiscal policy”. 

“In addition to positive flow developments from the tax amnesty, the recent cabinet reshuffle suggests a cementing of the reform agenda,” ANZ says in a research note.

“Should the liquidity impact from the tax amnesty have a similar effect to a rate cut, BI can preserve its tools for future use and extend the life of the easing cycle.”

ANZ says the upside surprise in Indonesia’s economic growth has been driven by domestic demand, particularly a surge in Government spending (+6.28% y/y), investment (+5.06% y/y) and household consumption (+5.04% y/y). On the external front, exports contracted by 2.73% y/y.
“As one of the less diversified exporters of Asia, particularly with a strong concentration of exports in commodities and raw materials, Indonesia has borne the brunt of the trade recession to date,” ANZ says.
“However, robust domestic demand has more than mitigated the drag from trade.

“There are a number of reasons why we expect domestic demand to continue to regain momentum in H2 2016, including more recent policy developments.
“However, it is also important not to lose sight of the pipeline of Jokowi stimulus measures that are now clearly starting to gain some traction as evidenced by the strong gains in government spending and investment.
“Domestic demand should accelerate in H2, led by consumption and investment. This takes into account (i) a very robust recovery in bank lending in the second half of the year on the back of amnesty inflows; (ii) lowering loan-to-deposit ratios for banks; and (iii) a loosening of loan-to-valuation ratios for housing, motor vehicles and scooters.
“Asset price inflation will be supportive of growth in the short term, but may become distortionary if left unchecked. “
“As we do not believe Indonesia’s financial markets are deep enough to likely absorb amnesty inflows at this stage, the risk is that these inflows and excess liquidity leak from the financial sector to the real sector.
“In short, Indonesia could find itself with overly accommodative policy settings that are too supportive of growth sooner rather than later.” www.live.anz.com (ATI).