Indonesia: The economy bottoms
- Indonesia’s GDP declined by -0.7% yoy in 1Q21
- Net exports and inventory restocking added to the headline
- … while all other segments shrank by a smaller measure
- Fiscal support, external sector, and vaccination are key pillars of support
- Our 2021 growth forecast remains unchanged. Pandemic management warrants attention
GDP growth posts a smaller decline
Indonesia’s GDP contracted by -0.7%yoy, in line with our forecast, vs -2.2% in 4Q20. But beyond the quirk of arithmetic base effect, the contraction was substantial, (-0.96%qoq vs
-0.4% in 4Q20). Rise in the infection caseload in early 2021 necessitated an extension of localised restrictions, slowing down activity.
The breakdown reveals that net exports and inventory restocking added to the headline, while other segments shrank by a smaller measure. Consumption fell 1.8% y/y, improving from -2.6% average in the prior two quarters. Private consumption was the larger drag at -2.2%, as evidenced by softening consumer confidence, retail sales and slower reopening of the tourism sector. Government consumption ticked up 3% y/y vs 1.8% in 4Q20 suggesting some extent of frontloading in recovery disbursements to prop growth.
Capital formation growth contracted -0.2%, recovering markedly from an average of -6.3% in the prior two quarters, lifted by growth in inventory restocking, investments into machine equipment, vehicles, and buildings & structures. Net exports contributed 0.4 percentage points (ppt) to growth, smaller than the past four quarters as import growth is also off its back.
Fiscal support, external sector, and vaccine progress - key pillars of support
Besides base effects, timely fiscal support, favourable trade account and hastened vaccine rollouts – are likely to be crucial catalysts for growth this year. Fiscal expenditure rose 13.8% y/y in 1Q21 outpacing revenues, led by higher allocations towards social assistance, subsidies, material, and capital spending. By late-March, about 11% of the national recovery package of IDR700trn had been disbursed. 1Q fiscal deficit has widened in nominal terms (see chart), vs same time last year and four-year average prior to that, suggesting some extent of frontloading in disbursements, boding well for growth. If this pace continues, higher government spending and consumption will help cushion the only gradual turn around in private sector demand.
Secondly, Indonesia’s exports were up 17% y/y in 1Q21, upheld to a greater extent by non-oil & gas shipments, led by mining (copper, nickel), and manufactured goods (base metals, rubber, palm oil, chemicals etc.). Even as imports fared better than 1Q20, a sharper export rebound saw the trade surplus nearly double at the start of the year. Favourable trade sector performance, benefiting from better faring global economies, especially China and the US, as well as an upcycle in key commodity prices will bode well for net exports as a support for growth as well as for current account dynamics.
Lastly, about 13mn residents have received at least one dose of vaccine, of which 8mn have received both doses (3% of the population).
In addition to the existing deal for 140mn doses from Sinovac, an additional 90-100mn is being sought for the same supplier, besides exploring more supplies from Novavax and Pfizer. Apart from the national rollout, the government is seeking to procure 35mn doses from China’s Sinopharm and Russia’s Sputnik for rollout of the gotong royong or the private vaccination drive which is due to start later this month. To attain the planned target of two-thirds of the population i.e. 182mn by 1Q22, the pace of daily vaccinations needs to increase by at least five times, which also implies that sufficient supplies will need be ramped up.
Encouragingly, Indonesia’s daily case count has halved from Jan-Feb highs, in midst of an extension in micro restrictions and more recently, a ban of the annual practice of inter-provincial travel during the annual Idul Fitri tradition of mudik, in a bid to curb the infection. As a precautionary move, the number of public holidays has been reduced this year as well as restrictions on travel to/from countries which are experiencing a sharp rise in infections. Timely and efficient inoculations will help minimise the humanitarian cost in the event of any resurgence in cases, especially as pockets of ASEAN face a fresh surge in cases e.g. Malaysia and Thailand (ASEAN-6 chartbook: Covid uptick poses a hurdle).
Official forecasts have been tempered in recent weeks, with Bank Indonesia projecting 2021 growth at 4.1-5.1% and Finance Ministry at 4.5-5.3% (DBSf: 4%). Base effects will be most pronounced in 2Q-3Q, with the Coordinating Minister for Economic Affairs pegging 2Q GDP growth at 6.9-7.8%. Besides key catalysts of vaccination, trade and fiscal support, pandemic management will remain crucial in charting the path of revival for the economy.
Stabilisation in the USD and US rates have provided a breather to the domestic markets. IDR bond yields have rallied from March highs, whilst the IDR has trimmed losses to -2.7% YTD depreciation year-to-date. Counterbalancing factors like a smaller share of foreign ownership of government bonds, manageable current account deficit, regular FX operations by the authorities to contain volatility and broader investment push to attract flows are likely to underpin the IDR this year.
To read the full report, click here to Download the PDF.
Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.