The following is a report from leading Indonesian lender PT Bank Danamon on Indonesia's second-quarter GDP result.

Indonesia Economic Briefing

2Q13 GDP: Growth eased further on slowing investment

By Dian Ayu Yustina, Anton Hendranata & Anton H. Gunawan

August 2, 2013

Economic Highlights

• ·         Indonesia’s economic growth slowed to 5.81%yoy(2.61%qoq) in the second quarter compared to 1Q’s number at 6.03%yoy (revised up from 6.02%yoy). The number is slightly below our forecast (5.88%yoy) and the consensus (5.9%yoy). The second quarter’s growth was at its slowest pace since September 2010. Downside was more on the domestic demand (i.e. private consumption and investment), particularly the declining pace of fixed investment.
• ·         Private consumption slowed to 5.06%yoy slightly below our forecast (5.11%yoy) and lower compared to last quarter’s figure at 5.17%yoy. This reflected the consumption pace has begun to moderate due to rising inflation expectation in anticipation of the subsidized fuel price hike.  Government consumption was at 2.13%yoy higher than Q1, but this is unusually lower as government consumption tend to pick up in the second quarter.
• ·         Fixed investment grew significantly lower by 4.67%yoy. Signs of slowing fixed investment has been seen as construction activities also moderating to 6.88%yoy (compared to 7.00%yoy in 1Q).  Declining pace of FDI in Q2 also gave signal of a moderating capital goods imports thus affecting the fixed investment growth in Q2.
• ·         Despite the declining exports performance (statistic office data), net exports seemed to be growing positive in Q2, however we should be careful in looking at this number. In nominal terms net exports was actually declining. We think that the significant decline in the commodity prices (despite the depreciation in the rupiah) have led to a decline in the deflator, thus in the real term net exports is still positive.
• ·         On the sectoral basis, growth is still driven by the tertiary sector particularly the transport and communication sector.  Financial and real estate sector slightly slowed as reflected in the slowing credit growth in the banking sector.  The mining sector depressed further as affected by the weak global economy. Meanwhile the manufacturing sector growth is still relatively stable compared to Q1. This is reflected in the positive large and medium industry performance that recorded growth of 6.57%yoy (statistics office data). However weakness was seen in the exports oriented industries i.e. (machineries, textile and rubber), while overall growth in the manufacturing sector is driven by printing industry, vehicles and base metal industry.  Small and micro industry performance was also positive, grew significantly higher at 15.6%yoy compared to the first quarter growth at 4.84%yoy.

Policy and Market Implications

• ·         We expect growth in the next quarter will slowdown further, as the surging inflation will affect the purchasing power, hence private consumption may slow significantly. However, seasonally rising demand during Ramadhan and Lebaran festivities may limit the drop. Thus we expect the full year economic growth forecast this year at 5.88%yoy. Growth in the 4th quarter may slightly rebound as rising spending in preparation for the general election may give push to the domestic demand.

·         Impact on the financial market should be limited as slowing growth is a logical consequence of rising inflation in the midst of weak external environment.  However BI may put attention on the weak economy, therefore raising the BI rate further may be their last option particularly if the fuel price-led inflation impact can be contained in the next two month. Thus, we maintain our forecast for the BI rate at 6.5%yoy by year end.