Economic Flash - Indonesia's 1Q GDP growth - Bahana

Still strong at 6.5% y-y, but lower than consensus
§ Led by private consumption (+4.5% y-y) and healthy investment level (+7.3% y-y), Indonesia’s 1Q11 GDP growth reached 6.5% y-y (exhibit 5), higher than our estimate of 6.4% y-y, but slightly lower than market consensus of 6.58% y-y (exhibit 2).
§ However, we believe that underlying growth remains strong, particularly given that this was the best 1Q y-y GDP growth since 1998. Compared to 4Q10 GDP growth of 6.9% y-y, 1Q11 GDP performance slowed on the back of deceleration in government spending and net trade, as the stronger IDR stimulated higher imports, which grew 15.6% y-y in 1Q11, outpacing exports growth of just 12.3% y-y (exhibit 5).
§ On the industry side, strong support from agriculture and financial services helped GDP to grow at 1.5% q-q. Better harvesting in March and aggressive rice imports during 1Q11 were the main factors behind the 20.6% q-q growth in the agriculture sector (exhibit 6), whereas higher Business Tendency Index (BTI) in 1Q11 for the financial sector compared to 4Q10 also provided solid 1Q11 performance (exhibit 3).
Outlook and market impact
§ Going forward, with domestic consumption (56% of 1Q11 GDP) continuing to be strong, we believe Indonesia’s growth will remain well supported. We expect domestic consumption to be in line with the estimated Consumer Tendency Index (CTI) which suggests greater spending by Indonesian consumers in 2Q11 (exhibit 4).
§ In line with consensus and the Finance Ministry’s current estimate, we expect 2011 GDP growth of 6.4%, up from 6.1% in 2010.
§ With government spending on the decline (exhibit 5), insufficient capacity could be a problem, requiring the government to deal with the overheating of the economy, particularly given that core inflation has continued to rise.
Nevertheless, drop in oil prices to below USD100/bbl will help the government contain May’s inflation, before reaccelerating in June, just ahead of July’s back-to-school and fasting period. Thus, we still expect BI to hike its benchmark rate by 25bp in June to 7.00%. Once this final tightening is out of the way, we expect markets to perform better.