Indonesia’s GDP growth steadies in Q4 2014 as investment pick-up offsets weaker consumption

Beating expectations of a sharper slowdown, Indonesia’s real GDP growth steadied at 5.0% y/y in Q4 2014 (Consensus: 4.9%), a pace that matched the previous quarter; and led by a pick-up in investment activity, which offset weaker consumption expenditure and a deeper contraction in exports. The latest GDP outturn closes a challenging year for the Indonesian economy with average annual GDP growth slowing to a 5 year low of 5.0% in 2014 from 5.8% in 2013 and 6.3% in 2012. A key factor dragging consumption (66% share in Indonesia’s GDP) in Q4 was a 33% hike in subsidized fuel prices last November and the subsequent policy rate hike by Bank Indonesia. Looking ahead, we believe that risks to Indonesia’s growth remain broadly balanced. Oil-led moderation in inflation pressures and the new government’s commitment to enact structural reforms and pro-investment policies has helped improve business and consumer confidence. While this bodes well for growth prospects, Indonesia’s economic recovery is likely to be uneven in 2015 as policymakers’ battle external pressures emanating from 1) a protracted slowdown in commodity prices, particularly coal and palm oil, which are key export commodities of Indonesia 2) sluggish global demand and 3) looming normalization of US Fed rate which, we believe, would keep Bank Indonesia on a tight monetary policy stance throughout 2015. Meanwhile, domestic challenges related to effective implementation of structural reforms remain a concern despite waning opposition for the Jokowi government in pushing through its reform agenda. Against this backdrop, we expect Indonesia’s Q1 2015 GDP growth to improve marginally to 5.2% y/y and project full year 2015 growth at 5.4% y/y, which is lower than the recently downgraded official budgeted target of 5.7% for 2015.

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