Indonesian economic growth rebounds slightly in 2017, export growth likely to moderate in 2018

Indonesian economy expanded slightly above expectations on a year-on-year basis in the fourth quarter of 2017. The real GDP grew 5.2 percent. For the whole of 2017, the economy expanded 5.1 percent, consistent with market expectations. Meanwhile, investment in the economy grew 7.3 percent year-on-year in the fourth quarter, the most rapid rate since early 2013. Construction-related investment growth has quickened to 6.7 percent and is expected to be underpinned by the government’s infrastructure projects in the future, noted DBS Bank in a research report.

But as seen in the third quarter, the boost to investment growth came from the machine/equipment component that grew 22.3 percent in the fourth quarter. In the meantime, capital goods imports also saw a strong 19.9 percent growth in the fourth quarter. Following four consecutive years of contraction, capital goods imports grew robustly by 12.1 percent in the whole of 2017.

Meanwhile, consumption growth accelerated in the fourth quarter to 5 percent year-on-year. Discretionary consumption growth underperformed again, rising 4.7 percent. There was no material spill-over from strong growth into commodity exports in 2017. Nominal wage growth for farmers continued to be sluggish at 4 percent.

“We expect the slight boost from higher commodity prices to be more evident this year, particularly if investment growth sustains at more than 6 percent in 1H18. The 171 regional elections in June are also likely to bolster consumption growth, especially in the rural areas”, said DBS Bank.

Export growth is expected to moderate noticeably in 2018 unless commodity prices continue to rise higher. As such, the current account deficit is likely to widen towards 2 percent of GDP from a projected 1.7 percent in 2017. Meanwhile, Bank Indonesia is not expected to cut its policy rates further, particularly given its growth optimism in recent weeks. In spite of the headline inflation coming in at a 13-month low of 3.3 percent in January, stable rates are expected from BI for now, stated DBS Bank.

“BI’s policy focus has shifted towards maintaining stability of the rupiah which, in our view, is an important factor in the investment cycle. At this juncture, we maintain our forecast for a 25bps rate hike by BI by the year-end”, added DBS Bank.

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