Growth Rebound in the Cards

INDONESIA - Report 28 May 2015 by Cyrillus Harinowo and Maria Kartika Purisari

Executive Summary

Growth was even lower than expected in Q1, dropping below 5% for the first time in years -- though, interestingly, business confidence is holding steady. So we may see a bit of recovery in H2. Annualized growth in Q1 was 4.71%, vs. 5.01% in Q4 2014.

Low Q1 growth was expected, though, given the symptoms. Q1 corporate earnings were down as well. But the Central Board of Statistics reported that the Q2 business confidence survey indicated stability.

Budgeted public spending only began in earnest in May. Certainly this will help the economy to start humming again. The banking system exhibited the same trend, with lending activities forecast to accelerate in Q2, and especially in H2. Manufacturing companies will boost output in the run-up to the Muslim Ramadan holidays, which run from mid-June to mid-July this year. These three stimuli combined suggest business activity will expand through yearend.

Results in the international arena were more auspicious, with the persistent CAD softening somewhat. April saw a trade surplus, on par with the rest of 2015 so far. That allowed Bank Indonesia to report a significant improvement in the current account balance. The CAD, at over 2.9% of GDP in 2014, narrowed to just 1.8% of GDP in Q1 2015. The April 2015 trade surplus was $434 million. This surplus happened at the time when imports should peak, due to the approach of Ramadan, and subsequent festivities. Imports, especially for raw materials, generally peak three months before the holidays, as producers prepare to increase outputs.

Inflation was also subdued in April, with 0.36 m/m inflation bringing y/y inflation to 6.79%. We expect this number to fall back to around 4% to 5% by yearend, after the effects of 2014 yearend inflation subside. The Central Bank exhibited enough confidence in the stability of the economy to keep its benchmark interest rate constant, at 7.5%.

The Central Bank remains optimistic that economic growth this year will be between 5.2% and 5.4%, a level we consider achievable, if below the initial target of 5.7%. For 2016, the government projects growth at 5.8% and 6.2% -- also a quite achievable level in our view.

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