Morgan Stanley

JAKARTA (TheInsiderStories) – Indonesia’s gross domestic product (GDP) will recover in the second half of 2017, driven by global trade, a pickup in fiscal spending, and a more efficient government expenditure mix, Morgan Stanley research.

The second quarter GDP growth only 5.0 percent or below estimate and consensus at 5.1 percent, as domestic and external demand momentum softened. However, they still look for a mild growth recovery in second half of 2017.

“Our 2017 GDP growth forecast stands at 5.2 percent YoY (vs. 5.0 percent YoY in 2016),” wrote economist of Morgan Stanley Asia, Deyi Tan along with her associates, Zhixiang Su and Fuxin Liu in a report with title “Indonesia Economics: 2Q17 GDP Held Steady; Waiting for Mild Recovery in 2H17.”

After the recently revised 2017 state budget, they also revise up that the government expenditure will pick up to 19.0 percent YoY in 2H17 from the initial expectation of 11.4 percent YoY.

Moreover, a more efficient government expenditure mix will generate better multiplier effects, the crowd in private sector domestic demand, and underpin a mild growth recovery.

On the external front, they expect that Indonesia’s export volume growth to be sustained at respectable pace due to their view of a synchronous global recovery in both developed market as balance sheet recession passes and emerging market ex China as macro adjustment has been made and macro stability restored after 2013’s “taper tantrums”.

While on monetary, they expect Bank Indonesia to keep policy rates on hold in the second half of 2017 before hiking 50 bps in the first half of 2018. The latter is predicated on their view that GDP growth will edge up to 5.4 percent YoY in 2018 or higher than 5.2 percent YoY in 2017.

Morgan Stanley also views that Indonesia economic fundamentals are healthy which is reflected by household debt GDP ratio and corporate debt to GDP remain at benign level. There are no macro excesses that would have necessitated a deeper and sharper slowdown for such excesses to be purged.

Meanwhile, momentum in wage growth and employment growth appears respectable.

In addition, the economy is no longer exposed to macro stability risks like those seen in 2013. Recall that in 2013, the current account deficit (CAD) swelled to 3-4 percent of GDP, real rate differentials vs the US were thinner, and Indonesia’s policymakers had to tighten monetary policy to rein in domestic demand, narrow the CAD, and reduce dependence on external funding when the US tapering policy was announced. Now, however, the CAD has narrowed to 1.0 percent of GDP in the first quarter of 2017 and expected CAD to stay benign at a 1.5-2.0 percent of GDP in the second quarter of 2017.

Indonesia’s real rate differentials vs. the US are also higher and policymakers have accumulated foreign reserves this year amid capital inflows. These factors help policymakers to cope better with capital volatility and mitigate the likelihood of macro stability risks translating into a domestic demand slowdown. (RF)

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