Indonesia economy at slowest pace in years at 5.1% y/y in 2Q14

Investments also weakened due to political uncertainty.

Indonesia’s GDP growth came in slightly below expectation at its slowest pace since 4Q09. The economy slowed further to 5.1% y/y in 2Q14 (Bloomberg: 5.2%) from 5.2% y/y in 1Q14.

According to a research note from UOB, although private consumption growth held up at 5.6% y/y in 2Q, investments weakened due to the political uncertainty before the presidential election in July.

Meanwhile, exports contracted for the second consecutive quarter by 1.0% y/y as the export ban on the mineral ore continued to weigh while external demand remained uninspiring.

Correspondingly, the mining and quarrying industry contracted for the second straight quarter.

Nonetheless, net exports recovered but this was mainly due to a sharper contraction in imports.

In view of the weak growth in the first half, UOB now expects full-year GDP of just 5.2%, down from its earlier forecast of 5.5%.

This assumes that growth in the second half picks up to 5.3%. In addition to more recent evidence of growth pick-up in the developed markets and China, the resumption of copper exports by Freeport, one of the two largest copper miners in Indonesia, is expected to help lift the export outlook in 2H14.

Joko Widodo’s election will also be positive for the investment sentiment.

Here’s more from UOB:

Indonesia’s external balances will remain in the limelight. June trade data released on Monday was slightly more positive than expected, with exports outperforming expectation as it rose 4.5% y/y (Bloomberg: -1.0%), recovering from 8.1% contraction in May.

Non-oil and gas exports turned in growth of 5.6% y/y in the month while the contraction in oil and gas export narrowed to -0.4%.

Overall for 2Q14, total trade balance turned in a deficit of US$2.2bn from a surplus of US$1.1bn in 1Q even though it was an improvement from US$3.1 bn deficit in the same period of 2013. That suggests the current account deficit for the quarter will likely be around 4.0% of GDP, widening from 2.1% in 1Q14.

We are retaining our full-year forecast for the current account deficit at 2.9% of GDP vs. 3.4% in 2013.

Indonesia’s headline inflation came in within expectation at 4.5% y/y in July, easing sharply from 6.7% in June as base effect kicks in (domestic fuel prices were raised sharply end-June 2013).

Inflation will settle into the central bank’s target of 3.5-5.5% in the second half of the year.

Despite the moderation in the inflation rate and the sluggish growth in the first half, Bank Indonesia will likely remain on hold in the coming months.

Current account deficit remains a concern for Indonesia even as we expect some improvements in the second half of the year due to some recovery in mineral exports and stronger demand from China and the developed markets.

Another fuel price hike before the end of the year cannot be ruled out and that will lead to a rebound in the inflation rate.

Even given our base scenario of a fuel price increase next year, the prospect remains for the central bank to raise interest rates in the months ahead while a cut is looking increasingly unlikely in the face of US monetary normalisation in 2015.

We are reiterating our forecast for the benchmark interest rate and overnight deposit facility (FASBI) rate to be kept unchanged at 7.50% and 5.75% respectively for the rest of the year.