ECONOMIC UPDATE – GDP – Better but not as good as expected

Jump in export and investment drive the growth

Statistics Office (BPS) data showed 3Q17 GDP growth had a mild increase at 5.06% YoY with quarterly growth came in at 3.18% QoQ (2Q17: 4.00% QoQ), which is below our estimation and Bloomberg consensus (see table on left). Although much affected by low base effect of last year Lebaran festive day in 3Q17, we still see jump in export and investment are positive. Investment increased 7.11% YoY (5.25% QoQ) in 3Q17. We see that government infrastructure projects still become one the main drivers of investment as the building segment improve 6.28% YoY and also machine and equipment segment increased by 15.18%. This is in line with the jump of imports in July which increased more than 50% YoY even though seasonal effect also played its part. We believe that investment can grow further in upcoming quarters as much government’s infrastructure projects will be finished within 2017 – 2019. Exports also experienced a big jump at 17.27% YoY due to better global demand and low base effect. We see that exports growth may face downturn as Indonesia’s main export destination, China, is expected to have softer growth in 2018.

 

Weak consumption prevent firms to add more inventories

On the other hand, consumption still faced some challenges as it only grew 4.93% YoY (1H17: 4.94% YoY) which is actually in line with our expectation. Low consumption growth indication had been seen from weak retail sales which had negative growth in July and only posted weak growth of 2.2% in August. The causes were still the same with previous quarter, which are electricity price hike for middle low segment and high uncertainty of tax and political condition for middle upper segment. According to Bank Indonesia’s data, average propensity to consume (APC) remained low in 3Q17 at 64.7%, lower than 3Q16 at 70.1%. Low domestic demand made companies hold their production in 3Q17 which reflected in -51.69% YoY decrease of inventory change. Moreover, we believe that companies still have abundant inventories as sales in previous Lebaran festive season disappointed. Going forward, we see that consumption will have gradual recovery next year as government start to boost middle lower purchasing power by adding social spending.

 

3Q17 GDP by sectors: manufacture at its highest in Jokowi’s term

Industry wise, GDP growth in 3Q17 was led by information and communication sector which grew 9.35% YoY in 3Q17. Transportation and storage sector also posted a strong growth at 8.25% YoY. Furthermore, manufacture sector which proportion is around 20% of GDP posted the highest growth since Jokowi became the president with 4.84% YoY. This may signal further improvement on manufacture and overall economic as long as the domestic demand can recover.  On the other side, agriculture sector growth weakened to 2.92% YoY which may become one of the reasons behind declining inventory change we’ve discussed before.

 

Unemployment continues its downward trend

BPS also released biannual job market data for February 2017 reading. Indonesia’s February 2017 unemployment rate slightly eased to 5.50% from a year before at 5.61%. Unemployment rate in village decrease to 4.01% (Aug-2016: 4.51%) but in cities increase to 6.79% (Feb-2016: 6.60%). 

 

GDP growth at 5.1% in 2017 and 5.3% in 2018

We maintain our view of 5.1% GDP growth for full year 2017 as we predict 4Q17 growth will be around 5.2% to 5.3% on the back of investment. For 2018, we see that 5.3% is a realistic one, lower than government’s target at 5.4% as we see consumption will have gradual recovery. Although consumption is still low, we do not see a chance for central bank to cut its policy rate again as the Rupiah started to fluctuate since last September.