Domestic demand key to lift Indonesia’s GDP growth

Indonesia’s February trade surplus came in as a pleasant surprise. The surplus reached USD 1.1bn, highest monthly surplus since July 2015. Export growth for the month reached -7.2% y/y, as compared with the forecast of -14.8%. But it is still very early to call this as turning point for export growth. Growth in exports, on sequential terms, continues to trend lower. Meanwhile, import growth continues to be weak in February at 11.7% y/y.

However, there are certain encouraging takeaways. Intermediate goods, which declined 16%, were the main drag on imports.  This can be an indication of further weak external demand. Consumer goods imports recorded a solid growth of 21.6% in February, bringing the year-to-date growth of 34.4%. Even if this might be due to low base effects from 2015, it still helps the domestic economic rebound, particularly when the consumer confidence has also rebounded in recent months.

Domestic demand can bring the Indonesian GDP growth back in the 5% territory, which seems to have been recognised by both the Bank Indonesia and government. However, the room for fiscal stimulus is limited with the 3% fiscal deficit legal ceiling. Meanwhile, slowing inflation and stable rupiah has permitted the central bank to ease its policy. Bank Indonesia is expected to further lower rates, but it is likely to keep a cautious approach going forward.