Indonesia: Domestic drivers outweigh trade in 3Q

3Q23 GDP growth slows marginally to 4.9% yoy, also easing on sequential terms

Domestic drivers offset softer export performance

Elections-related boost is in the offing

We remain comfortable with our 5% growth forecast for this year and next

BI is likely to weigh this growth miss with rupiah intervention ahead of the November policy meet

GDP release summary
Indonesia’s growth grew 4.94% yoy in 3Q23, slightly missing expectations of 5% and down from 5.2% yoy in 2Q. On sequential basis, output expanded by a slower 1.6% qoq from 3.9% the quarter before, weaker than the historical quarterly pace. On seasonally adjusted basis, the quarterly pick-up rate was slower at 0.8%, nearly halving from 2Q.

The breakdown revealed:
Notwithstanding the slower pace of headline pickup, domestic engines continued to offset the weakness in the export sector. Not all engines are, nonetheless, firing at the same pace. Total consumption eased to 4% yoy from 2Q’s 5.9% on account of a slight pullback in household spending (5.1% vs 2Q’s 5.2%) but a more notable drop was in public spending at -3.7% yoy vs 10.6% in 2Q. Even as the 3Q inflation rate eased, the cumulative run-rate since 2022 continues to be high. Investment growth surfaced as an important contributor to growth, as the segment expanded 5.8% yoy vs 4.6% quarter before. Reflecting this buoyancy, domestic and foreign investments accelerated in the quarter in the mining, metals-based processing, downstream activities, chemical, pharma as well as utility sectors.

Exports decelerated by a sharper -4.3% yoy vs 3% in 2Q, accompanied by a sharper contraction in imports at -6.2% yoy (vs 2Q 3.1% yoy). A sharp correction in commodity prices have taken a bite into merchandise goods performance, with palm oil (-27% yoy in 3Q), coal (-44% yoy) and nickel (-1% yoy), not helped by base effects. Concurrently, demand from key markets has also slowed, as shipments to Japan, China, US, Singapore, and Malaysia declined in the period. On the imports end, inward purchases of the heavy- weight raw materials slumped 13% yoy in the first three quarters of this year, whilst consumer and capital goods rose 7% and 9% respectively, helping to keep the cumulative trade surplus in a better shape than anticipated. In all, a concurrent slowdown in imports saw net exports return to black, contributing 0.2 percentage points to overall GDP growth, improving from 2Q’s -0.1% but far lower than 2.0pp in 1Q23.

Outlook
Average GDP growth in 1Q-3Q23 stands at 5.1% yoy, not far from our full year forecast at 5% y/y. In the final quarter of the year, beyond base effects, we expect the start of the pre-election campaigning period to provide a lift to consumption, even as greenfield investments slip into a wait and watch mode. Demand faces a few headwinds by way of rising food prices (rice, sugar etc.) which has attracted administrative measures to limit the impact on households’ purchasing power. The local weather agency BMKG has warned of potential drought due to El Nino phenomenon, which might extend at a moderate level until 1Q24.

In comments cited by thepress. Most areas have reportedly experienced low rainfall in Jul- Oct23 including the economically crucial Java Island, Sumatra, Kalimantan, Sulawesi, amongst others. If output is impacted, these are likely to underpin demand for food imports to keep domestic prices in check.

Notably, incoming remarks from all the Presidential hopefuls have been growth supportive, focused on investments, poverty alleviation, containing inflation, lift to provincial activity, amongst others, suggesting the upcoming political transition is unlikely to jeopardise the economic momentum (Indonesia’s economy and markets aroundelections). Investments therefore are likely to remain a key counterweight for growth, even as export-oriented sectors (particularly commodities) face a cloudier outlook. In all, we are comfortable with our 5% growth forecast with this year and 2023.

Policy direction
Bank Indonesia delivered a surprise hike in October (Bank Indonesia guns for rupiahstability with a surprise hike), with their positive view on growth providing the headroom for a hawkish stance. The US Fed’s decision to pause on rates and the subsequent correction in the US dollar has helped stabilise the rupiah in recent sessions. Looking ahead, we maintain our expectation for a last hike of this cycle in this quarter. In the run-up to the November policy review, the central bank is likely to weigh the evolving growth momentum, currency’s direction, market pricing of the FOMC rate moves, and incremental portfolio flows. Towards this, the success of the newly introduced USD-denominated FX securities SVBI in attracting fresh flows will be keenly watched. Key risks to our call for another rate hike are a sharp correction in the US dollar (stronger rupiah) and a deeper pullback in the US rates, which will help ease the pressure on Indonesia’s securities to maintain wide favourable rate differentials.

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