1Q24 gross domestic product release and policy outlook

1Q24 Gross Domestic Product Release and Policy Outlook

Economic Outlook

We expect real GDP growth to average 5.0 percent yoy in 2024

Domestic demand will be a key counterweight to weak trade performance

Investment spending is being frontloaded by the outgoing government

Spending towards personnel (salary increase for civil servants), social assistance (special programs extended) and infrastructure (to complete ongoing projects) have risen.

External trade will remain under a cloud on low commodity prices and spare capacity in China.

February’s elections produced a clear winner, boding well for political stability and policy continuity. Bent towards welfare spending might push up the fiscal deficit in 2025

Risks: Global growth is faring better, but commodity price correction and geopolitics are a challenge; Bear case: growth 4.7 percent

Foreign Direct Investment (FDI) interest in Indonesia’s downstream industries is strong. EV battery sector will seek to be competitive in the face of alternatives

Progress on the new capital under watch. Plans are to inaugurate parts of Nusantara during the Independence Day celebrations in August

Inflation and policy

1H24 inflation will stay firm above 3 percent on higher food and religious festivities, before stabilizing around 2.5-3.0 percent in 2H

Price controls and absence of fuel price hikes will keep overall inflation within the new 1.5-3.5 percent inflation target this year

Dollar strength and delay in US Fed rate cut expectations (and unfavorable domestic cues) have led to a weaker rupiah, attracting active intervention

Bank Indonesia (BI) has kept short-end rates high to attract inflows, introducing new instruments

After a 25bp hike in Apr24, BI is likely to stay on an extended pause for the rest of the year.

Macro stability

Incoming government’s spending plans, timing of VAT rate hike and higher social spending will see fiscal deficits head back up past –2 percent of GDP this year and next

Current account is expected to stay in red (–1.5 percent of GDP) on decelerating goods exports, and upturn in imports, but at manageable levels

Long term external debt: End-23: 24.6 percent of GDP

Short term external debt: End-23: 5 percent of GDP

1Q24 GDP growth – headline

The Indonesian economy expanded 5.1 percent yoy in 1Q24, along our expectations and largely steady from the 2023 average. Output contracted -0.8 percent qoq, in line with past trends.

The key lift was from higher government and campaign-related spending, while investments slowed ahead of the elections. Trade was a drag on the headline

On indexed basis, consumption is roughly 10 percent above pre-pandemic levels, slower than the 13 percent rise in headline growth

With 2Q likely to benefit from seasonal updrift, we maintain our full year forecast of 5 percent for the year.

Breakdown

Expenditure side

Final consumption was the main contributor to the headline, rising by a sharp 6.6 percent yoy from average 4.7 percent in 2023. While household consumption was steady at 4.9 percent yoy, government demand rose a sharp 20 percent yoy coupled with nonprofit Institutions serving Households Final Consumption Expenditure (which includes political parties) which rose 24.3 percent percent on pre-election spending.

Investment growth slowed to 3.8 percent yoy from 5 percent average last year, while the net exports turned negative.

The contribution of total consumption (led by GCE) was high at 4 percent, strongest in over a decade, while that of investment and trade fell (net exports shaved -0.2 percent from growth.

Pre-festive demand, social schemes (includes rice aid and cash handouts to needy households), adjustment in civil servant salaries (8 percent increase), disbursement of the 13month bonus and campaign spending was likely behind the increase. Frontloading of investments failed to provide a material lift to the segment, while goods exports slowed.

Industry side

Overall, the pickup was driven by non-farm sectors. The key sub-segments of manufacturing and Wholesale and Retail Trade-Repair of Motor Vehicles and Motorcycles rose 4.1 percent and 4.6 percent respectively.

Outlook

Indonesia’s GDP growth kickstarted the year on a positive note. We expect 2Q growth to benefit from festive related seasonality, backing our full year growth forecast at 5 percent.

Steady growth provides the headroom to the BI to be steadfast in managing price and rupiah stability. After the April rate hike, while the possibility of further rate hikes remains on the table, the response framework might include sterilised intervention, bond purchases, drawing inflows at the shorter end of the curve and calling on state owned enterprises to optimize/ restrain their sizeable dollar purchases.

A strong intervention presence has pushed down the foreign reserve stock by $6bn in 1Q24, after climbing by $9bn in 2023. The bias to keep the short-term/ open market operations rate high to draw in foreign flows is also bound to continue, with the return on SRBIs drifting up since Feb24 and markedly higher than the rate on offer when the instrument was introduced in Sep23.

We delay rate cuts to 2025.

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