[Kabar-indonesia] Morgan Stanley: Indonesia: 2Q GDP Accelerated on Government Spending

[Joyo at aol.com]

Morgan Stanley Economists 
August 16, 2006

Indonesia: 2Q GDP Accelerated on Government Spending

Deyi Tan (Singapore)

GDP growth accelerates in 2Q: Indonesia’s GDP grew by
5.2% YoY in 2Q, accelerating from the upwardly revised
4.7% seen in 1Q and higher than our and market
expectations of 4.8% and 4.9%, respectively for 2Q06.

Acceleration due largely to higher government
expenditure: Real government expenditure rose 31.4%
YoY (compared with 13.0% YoY in 1Q), partly on base
effects and partly as government expedited on spending
in order to support the economy. This acceleration
alone contributed 2.1 percentage points to headline
growth.

Worst may be behind us: Although the domestic demand
is weak, especially in consumer spending and fixed
investment, 2Q data appears to be indicating that
Indonesia’s GDP growth trend is bottoming out and the
worst may be behind us. 

Upgrading our 2006 & 2007 GDP forecasts: We are
revising our 2006 GDP growth marginally to 5.3% (from
5.1% earlier) and 2007 to 5.3% (from 4.9% earlier). We
maintain our view that domestic demand (consumption as
well fixed investments) should pick up going forward,
supported by declines in interest rates and a gradual
pickup in government’s capital expenditure.

2Q06 GDP Growth Accelerated to 5.2% YoY

Indonesia’s GDP grew by 5.2% YoY in 2Q, accelerating
from the upwardly revised 4.7% seen in 1Q and higher
than our and market expectations of 4.8% and 4.9%,
respectively, for 2Q06.  For 1H06, the economy
expanded 5.0% YoY (vs +5.3% in 2H05). As expected, 2Q
data appears to be indicating that Indonesia’s GDP
growth trend is bottoming out and the worst may be
behind us. 

Government Spending & Inventories Supported 2Q Growth

GDP breakdown indicates that most of the acceleration
in growth has been driven by government expenditure
and inventory changes.  Specifically, real government
consumption rose 31.4% YoY (compared with 13.0% YoY in
1Q), partly on base effects and partly as government
expedited on spending in order to support the economy.
 This acceleration alone contributed 2.1 percentage
points to headline growth compared with 0.8 ppt during
1Q06.  The inventory changes added 0.7 ppt to headline
growth, compared to 0.1%-pt in 1Q06.

Private Consumption and Fixed Investment Remained
Tepid 1QO6 domestic demand components have all been
downwardly revised, and, apart from government
spending and inventories, momentum in consumer
spending and fixed investment remained mostly tepid in
2Q.   Private consumption rose 3.0% YoY, sustaining
the downwardly revised 3.0% YoY pace seen in 1Q06 but
marking what we believe could be the gradual petering
out of the impact from the removal of fuel subsidies
in October last year.  Indeed, consumption indicators
are already showing mixed trends with momentum in
consumption loans and automobile purchases
decelerating, whilst retail sales and consumer import
trends seem to have reversed.  Meanwhile, fixed
investment contracted 1.0% YoY (vs +0.8% YoY in 1Q) on
the back of high interest rates as is reflected in
capital goods imports.

External Balance Support Remained Positive

Meanwhile, steady demand on the external front led
exports to accelerate to 11.3% YoY from the 10.9% in
1Q.  The detailed breakup we have so far shows healthy
performance in crude materials, mineral fuels and
manufactured goods exports.  Nonetheless, external
balance growth contribution narrowed to 1.8%-pt from
3.2%-pt on the back of also strong imports (+8.3%),
where we saw a 23.8% YoY increase in consumer imports
from 1Q’s 12.3% and a slight acceleration in raw
materials and intermediate goods imports to 3.5% YoY
from 1Q’s -6.8%.

Nudging up our 2006 and 2007 GDP forecasts

Better-than-expected 2Q06 growth leads us to revise
upwards our 2006 GDP forecast from 5.1% YoY to 5.3%. 
However, given that the better-than-expected 2Q06
growth was not due to upside surprises from consumer
spending or fixed investment but mostly due to
government expenditure, we are keeping our 2H06
forecasts unchanged and adjusting the headline merely
to fit in the stronger 1H06.

Our broad macro view remains intact.  We continue to
look for a 2H06 re-acceleration with the improvement
in private consumption as consumer spending normalizes
post one-time adjustment due to the hike in oil prices
and declining interest rates.  In addition, we believe
that, with declining interest rates as well a gradual
pickup in government’s development expenditure,
private investment should recover from 2H06 onwards.

We are also concurrently revising our 2007 GDP
forecast from 4.9% to 5.3% as we see improved macro
stability allowing the government to further shift its
policy bias from stability to pro-growth.  While we
maintain our outlook for reducing support from
external demand in 2007, we are building in a stronger
pickup in domestic demand.  Specifically, we expect
domestic demand to pick up pace from 4.5% YoY in 2006
to 5.9% in 2007.

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Joyo Indonesia News Service
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