Consumption lifted Indonesia Q2 GDP, but investment slowed: Natixis

August 7, 2018

JAKARTA - The Indonesian economy accelerated to 5.3%YoY in Q2 2018 thanks to robust private consumption and government expenditure, which expanded 5.1%YoY and 5.3%YoY, respectively. This is the first significant pickup since 2013, but investment decelerated to 5.9%YoY in Q2 from 8%YoY in Q1 2018, suggesting that the V-shaped recovery remains elusive.

On the external front, strong domestic demand caused imports to expand more than 15%YoY while exports grew by less at 7.7%YoY.

By sector, iron mining and transport had strong growth, expanding 23.1%YoY and 10.1%YoY, respectively. Meanwhile, the oil industry only improved on the margin from last quarter (+0.9%YoY from -2.9%YoY) and coal mining showed little momentum (-3.7%YoY).

In a research report, the French banking group Natixis says the Indonesian Rupiah has depreciated 6.6% against the dollar due to the US hiking cycle and capital outflows from the Indonesian market.

In response, Natixis says, Bank Indonesia hiked the 7D repo rate by 100bps to 5.25% since May 2018 to support the currency, even with inflation remaining manageable within the target band.

“Although the hikes successfully prevented the Rupiah from being the worst-performing currency in emerging Asia and the central bank from using reserves to support the currency, tighter monetary condition will weigh on growth, as signalled by slowing investment growth.”

Natixis says that tighter financial conditions, slowing China growth and uncertainty of an escalated US-China trade war will keep investment subdued.

“That said, the credit cycle shows green shoots and consumption, especially public spending, will be helped by the upcoming election.

“Although Indonesia is not trade dependent, risk-off sentiment and the Fed hiking will continue to put pressure on the IDR. This means that the central bank will likely need to hike further to follow the Fed and prevent excessive FX weakness.” (ATI).