2Q2018 GDP growth turned out to be the fastest in more than four years despite headwinds from the weak currency and global noises with a growth of 5.27% y/y, supported by private consumption and government spending though fixed investment rose at a slower pace. Despite notching the fastest annual growth since 4Q2013, the economy continues to face mounting challenges from its current account deficit, falling foreign exchange reserves and weaker currency. Added with a fallout in the region from the US-China trade war, these will threaten its external demand for key commodities including palm oil and coal.

Looking ahead, we are fairly cautious on the economic performance in fear of export revenues likely to remain low. Also spending on infrastructure could be slower as the government needs to keep its budget deficit within the mandatory limit of 3% of GDP, which would weigh on the potential growth and the tighter monetary policy that will slow demand. Our full-year GDP for 2018 and 2019 is around 5.2% and 5.4% respectively, supported by private consumption on the back of favourable confidence and real income growth, continued infrastructure investment, improvements in licensing and transport connectivity that will support private investment and export performance.

• 2Q2018 GDP growth turned out to be the fastest in more than four years despite headwinds from the weak currency and global noises. The economy expanded 5.27% y/y after registering a growth of 5.06% in 1Q2018. Growth was supported by private consumption, up 5.22% y/y in 2Q2018 from 4.79% y/y in 1Q2018 as well as government spending which rose firmly by 5.26% y/y versus 2.74% y/y in 1Q2018. Meanwhile, fixed investment rose at a slower pace by 5.87% y/y in 2Q2018 from 7.95% y/y in 1Q2018.

• But despite notching the fastest annual growth since 4Q2013, we believe the economy continues to face mounting challenges from its current account deficit and falling foreign exchange reserves which dropped by 8.1% in 1H2018. A weaker currency with the rupiah down 6.3% against the USD year to date, added with a fallout in the region from the US-China trade war also threatened its external demand for key commodities including palm oil and coal.

• Looking ahead, we are fairly cautious on the economic performance as to whether it can maintain the current pace of expansion. Fears of export revenues remaining low plus slower spending on infrastructure as the government needs to keep its budget deficit within the mandatory limit of 3% of GDP would weigh on the potential growth.

• Besides, the tighter monetary policy will slow demand, especially with Bank Indonesia having raised interest rates by 100 basis points over the past few months to support the rupiah. Any further tightening of the interest rates in a move to defend the rupiah from weakening against the USD will have a knock-on effect on spending.

• We project the full-year GDP to be around 5.2% for 2018 and 5.4% for 2019 supported by private consumption on the back of favourable confidence and real income growth with inflation being subdued though we expect some pressure from the weaker rupiah and effects from higher commodity prices. Infrastructure investment, improvements in licensing and transport connectivity that will support private investment and export performance will also support growth.

Source: AmInvest Research - 7 Aug 2018