Flash Notes-Indonesia: Growth Moderated Further In 2Q15

Indonesia’s GDP growth moderated to 4.67% y/y in 2Q15 from a revised 4.72% in 1Q15. This is the slowest growth pace since 3Q09. The growth moderation is in line with market’s expectation.

    While the contraction in export eased to -0.13% y/y in 2Q15 from -0.85% in 1Q15, other components of the GDP have registered slower growth in the quarter. Private household consumption remained the key growth driver, expanding at 4.97% y/y compared to 5.01% in the preceding quarter. Government spending growth moderated to 2.28% y/y from 2.71% in 1Q15 and similarly, fixed investment registered a weaker growth of 3.55% y/y vs. 4.29% in 1Q15. Import has slumped by a larger 6.85% y/y in 2Q15 vs. -2.27% in 1Q15, reflecting the underlying weakness in both consumption and export demand.

    Without a recovery in the commodity sector, the acceleration in fiscal spending is crucial for a stronger growth in the second half of the year. Although we expect the GDP growth rate to strengthen in the next two quarters, full-year growth target of 5.0% may still prove challenging in the current environment.

    While growth slowed, Bank Indonesia (BI) may not be able to cut interest rates anytime soon. Inflation is still elevated in the short-term and with IDR mired in depreciation pressure, it is difficult to see how BI can cut interest rates without contributing to further stress on capital flows.

    Headline CPI rose a higher-than-expected 7.26% y/y (Bloomberg: 7.1%) in July, similar to June’s. However, core inflation moderated to 4.86% y/y after remaining steady at 5.04% y/y in the last four months. We maintain our view that the inflation rate is already around its peak and should continue to hover at slightly above 7.0% y/y in the coming months before coming off in the last two months this year due to base effect. While there is risk of further monetary easing in the later part of the year, we believe that IDR weakness could continue to keep BI on hold at 7.50%, taking into consideration the rate normalisation in the US. The USD/IDR is likely to trade firmer as we head into the eventual rate lift-off in the US which we expect to take place in September.