Indonesia import surge heralds return of public spending

Indonesia's trade surplus narrowed sharply in August, falling to USD434mn, much smaller than expected and driven by a 21.7% m/m surge in imports. While partly seasonal, the strong post-Ramadan recovery in imports also coincides with the sharp rebound in car demand, with motorcycle sales finally returning to growth (+2.1% y/y) after contracting 23.6% y/y on average between January and July. 

More importantly, the improvement in imports reflects a promising sign that public spending is now restarting, particularly for heavy, more import-intensive infrastructure projects. Indeed, 28 August marked the groundbreaking of  the long-awaited Batang power plant in central Java, which was stalled for four years due to difficulties in land acquisition, a signal that construction could soon begin. 

"Moreover, President Jokowi's recent cabinet reshuffle will help to speed up investment spending. This will be the key growth driver in H2. Today's better-than expected trade report shows an encouraging sign that the public spending is gaining more momentum and is likely to set the stage for a stronger rebound in growth in the coming months", says Barclays.

However, with inflation trending above BI's target range in Q3 (Barclays: 7.2%), and given growing concerns of stress on the IDR, there is a strong case for the central bank remaining on hold this year. 

"At the same time, BI is visibly more reluctant to weaken the IDR in the near term, to avoid stoking imported price pressures. While the commodity drag due to weaker demand from China has not subsided, the central bank is likely to draw greater comfort from news that the authorities are speeding up infrastructure spending, which should drive growth in H2. The growth dividend from infrastructure spending should make a significant contribution from 2016 onwards", added Barclays.