First Insights - Indonesia: Growth slows further to 5% in Q3

GDP growth slowed more than expected to 5.0% y-o-y in Q3 from 5.1% in Q2 (Consensus: 5.1%; Nomura: 5.2%). This is the third consecutive quarter of weaker GDP growth and its slowest growth rate since September 2009. We have been voicing concerns that the on-going growth slowdown is posing downside risks to our 2014 GDP growth forecast of 5.3%, and this is indeed materialising, with year-to-date growth averaging just 5.1%. Q4 growth, led by investment spending and exports, is unlikely to show much improvement, given the political environment, continued weak external demand and falling commodity prices.

    This poses strong headwinds for structural reforms, in our view (see Asia Special Report - Indonesia: Here comes the hard part, 29 October 2014). We believe slower growth is another obstacle to raising retail fuel prices, despite the government?s increased rhetoric that it is imminent (see First Insights - Indonesia: Rising rhetoric on near-term fuel price hike, 4 November 2014). Raising fuel prices substantially this month could cause growth to fall significantly below 5% in Q4, a situation the new government will likely want to avoid. In terms of monetary policy, this also adds to Bank Indonesia?s concerns. Bank Indonesia was forecasting GDP growth of 5.1% in Q3 and 5.1%-5.5% for 2014. So, despite its focus on the current account deficit and risks of capital outflows, it has very limited room to raise rates further.