Indonesia’s GDP may have grown 6.7% in 3Q11

The slowdown in the global economy is not expected to impact on 3Q GDP numbers. 6.7% YoY (1.7% QoQ, sa) growth has been penciled into our forecast as the domestic economy maintains its robust growth pace. We maintain that 6.4% growth for 2011 and 6.1% growth for 2012 is attainable. While the outlook for the more export-oriented economies in Asia has darkened considerably following the protracted Eurozone debt crisis, Indonesia has not been affected. To be sure, consumer confidence (as measured from BI’s survey) has been inching up for several quarters and hit a new high of 116.7 in October. This is significant considering the amount of market volatility during the month of September.

Moreover, retail sales are up by 25.1% YoY (20% QoQ) in 3Q11 underscoring the resilience of the consumer. The outlook for the next six months is still bright as Indonesia continues to enjoy an extended period of high growth and low inflation. With headline CPI likely to push lower still in the coming months (bottoming out at close to 4% in 1Q12), conditions are conducive for consumers to continue spending.

The growth momentum for gross fixed capital formation will likely be maintained. Although sentiment probably took a dip in September, any impact on the real economy should be limited given aggressive intervention by BI. During that time, rupiah weakness was contained and bond yields were largely stable providing confidence to both businesses and consumers alike. Tax incentives introduced in August should also provide a boost to GFCF growth.

The growth momentum for gross fixed capital formation will likely be maintained. Although sentiment probably took a dip in September, any impact on the real economy should be limited given aggressive intervention by BI. During that time, rupiah weakness was contained and bond yields were largely stable providing confidence to both businesses and consumers alike. Tax incentives introduced in August should also provide a boost to GFCF growth.

Going forward, the outlook is no longer as rosy, but that can largely be attributed to negative external news from the Eurozone. With Greece’s membership in the EU at conducive for consumer stake, sentiment can sour spending leading to further portfolio outflows across Asia including Indonesia.

Should this occur, some volatility in Indonesia’s financial markets is to be expected even if BI steps in to stabilize the rupiah and/ or bond markets. Should global sentiment worsen in the next 1-2 months, we suspect that GFCF growth would be hurt through 1H12, posing downside risks to our 2012 GDP projection.