CLSA INDONESIA GDP - 2Q surge but soft components

Indonesian real GDP growth surged to 1.6% QoQ (6.5% saar) from 1.3% (5.1% saar) in
1Q10. (Note: saar stands for seasonally adjusted annualised rate). In YoY terms, GDP growth picked up to 6.2% in 2Q10 from 5.7% in 1Q10. The GDP acceleration was impressive but the shine rubs off with a closer look at the expenditure breakdown.

Private consumption slowed to 4.2% QoQ saar from 8.4% in 1Q10. Investment growth
similarly slowed to 4.3% QoQ saar from 8.7% in 1Q10. Real exports picked up only
moderately from 0.9% to 1.8% QoQ saar and were anyway outpaced by imports for a
negative net export contribution to GDP.

We expect private consumption and investment growth to pick up over the rest of the year but are slightly more cautious about the likely rate of acceleration. As a result, we are revising down our full year real GDP forecast slightly to 6.2%, from 6.5% previously. If private consumption, investment and exports all disappointed, what drove the 2Q10 GDP surge?

It was inventories and statistical discrepancy that provided the residual 0.7ppt of the 1.6% QoQ GDP growth. Domestic final sales (total consumption and investment) provided 1ppt and there was a 0.1ppt drag from net exports.

The sectoral breakdown shows services leading GDP with 9.8% QoQ saar growth, led by
transport & communications. Mining output rebounded at 7% saar after consecutive
contractions in the two previous quarters. Manufacturing and construction growth both
exceeded 5% saar while agricultural output contracted by a marginal 0.5% saar.

Looking beyond quarter to quarter volatility, notable observations are underperformance of the mining sector and outperformance of services. We have indexed the data to a common starting point at March 2006 = 100 in the chart below. The full potential of Indonesia’s extensive resources is hardly being tapped, a stark indication of government inefficiency and poor policy implementation.

Wage pressures in China and political risk in Thailand provide an opportunity for Indonesia to expand its manufacturing sector. However, there are issues that need to be addressed including restrictive labour regulations. Services have been growing
from a low base. Maintaining the rapid expansion will require bold policy from government on deregulation and opening to foreign investment.