indonesia - deloitte us · 7. sara schonhardt, “fuel price increase had to happen: jokowi,”...

These rating upgrades could not have come at a better time for Indonesia. There are some fears that the United States Federal Reserve’s (Fed) rate hike path could reduce interest rate differen-tials with emerging economies, potentially leading

to higher capital outflows from these economies.3 This, in turn, is likely to put pressure on emerging economies’ currencies and push up their borrowing costs. The two rating upgrades, therefore, likely re-assure global investors about Indonesia’s economic

IndonesiaEconomy off to a healthy start this year

By Akrur Barua

In April, Moody’s upgraded Indonesia’s sovereign credit rating to Baa2 from its lowest investment grade rating (Baa3).1 The upgrade by Moody’s, commending Indonesian authorities’ deft management to improve macroeconomic stabil-ity, came on the heels of another similar upgrade by Fitch in December 2017.2

fundamentals. It’s not a surprise then that 10-year bond yields in Indonesia have fallen by more than 100 basis points (bps) since the beginning of the year; low policy rates have also helped.4 This will likely keep borrowing costs in check, aiding invest-ments and fiscal health.

Growth was healthy in Q1 despite slowing exports

The economy expanded by 5.1 percent year over year in Q1 2018, marginally lower than the 5.2 per-cent rise in Q4 2017.5 Private consumption and in-vestments were the two key contributors to econom-ic activity during the quarter (see figure 1). Growth could have been higher, had it not been for a decline in exports growth. Exports grew by 6.2 percent in Q1, continuing to lose steam post the strong 17.0 percent rise in the third quarter of 2017. The dip in exports growth was primarily due to a decline in oil and gas exports (-6.4 percent). An uptick in imports did not help as well. On a positive note though, im-

ports growth has been mostly due to higher capital goods imports, an indicator of growing (foreign) in-vestments. For example, the value (in US dollars) of imports of capital goods grew by 27.8 percent in Q1, followed by a 40.8 percent rise in April. That augurs well for the economy in the medium to long run.

Taking heart from the rise in investments

A major positive for the economy over the past few quarters has been the uptick in investments. Gross fixed capital formation grew by 7.9 percent in Q1, the fastest pace of expansion since Q4 2012. Part of this rise is due to steady economic growth, while the government’s focus on improving in-frastructure and luring foreign investors has also helped. Foreign direct investment (FDI), in US dol-lar terms, went up by 11.5 percent year over year in Q1, continuing from an 11.3 percent rise in 2017.

It is worth noting that the national accounts data on investments indicates a recovery in machinery

Figure 1. Private consumption and investments drove GDP growth in Q1

Deloitte Insights | deloitte.com/insightsSource: Haver Analytics; Deloitte Services LP economic analysis.

Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Exports

Real growth (%, year over year)

Gross fixed capital formation Private consumption GDP

2

4

6

8

10

12

14

16

18

0

Indonesia: Economy off to a healthy start this year

2

and equipment since the second half of 2017. In Q1 2018, spending on machinery and equipment went up by 23.7 percent, continuing the momentum from Q4 2017. The pace of investments in buildings, how-ever, fell marginally in Q1 (see figure 2). With the government not likely to tone down its impetus on infrastructure spending, despite hiccups in funding via public–private partnerships and implementa-tion, investments within the economy is likely to continue expanding at a healthy pace.

Steady goes the consumer

Private consumption, a key driver of economic activity, grew by 5.0 percent in Q1, almost the same pace as the previous quarter. The pace of expan-sion in consumer spending is, however, still below the near 5.5 percent expansion witnessed in certain quarters during 2012–2013. For now, consumers are likely benefitting from declining price pressures, which have been on a broad downward trend since

mid-2017. In April, headline inflation was 3.4 per-cent, slightly up from 3.3 percent in the beginning of the year, but still within Bank Indonesia’s (BI’s) 2.5–4.5 percent target range.

Figure 2. Rising spending on machinery and equipment is good for the economy


Real growth in investments (%, year over year)

-15

-10

-5

0

5

10

15

20

25

30

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

Machinery and equipment Buildings Gross fixed capital formation


3

An improving labor market has also helped con-sumers. For example, the unemployment rate (non-seasonally adjusted) fell to 5.0 percent in Q1 from 5.5 percent in Q3 2017 (the last available data point for comparison). As a result, consumer confidence remains elevated,6 which is likely to keep consumer spending healthy; recent retail sales data points to that. Sales volumes went up by 3.4 percent year over year in April, continuing an uptick in momentum since February. Lower interest rates have also likely aided consumers as can be seen from the rise in con-sumer credit (see figure 3). Nevertheless, consum-ers are likely to remain cautious in the year before the elections in 2019.

BI will likely be wary about currency movements

Prices of foodstuff was the key contributor to inflation in April. Will higher global oil prices add

to this? Not likely. The government has kept a lid on administered prices, which includes fuel (see figure 4). This is a move away from initial reforms enacted by the government, whose effort at that time was to cut the large subsidy bill and reform public finances.7 The government’s current stance is not likely to change before elections in 2019. This will likely keep a check on inflation, which has been below the central bank’s upper limit of 4.5 percent since November 2015, and, thereby, enable BI to continue its easy monetary stance to aid economic growth. The central bank, however, has a different worry—the exchange rate. By the end of April, the rupiah had fallen against the US dollar by about 3.1 percent since 2017, edging downward with other Asian emerging markets such as the Philippines and India, as the Fed raised rates in the United States. BI’s response has been to support the rupiah by us-ing its reserves. From a record-high level of $132.0 billion in January, foreign reserves fell by 5.4 per-cent by April.

Figure 3. Consumers are aiding credit growth in the economy


Growth in outstanding loans by commercial and rural banks (%, year over year)

0

2

4

6

8

10

12

14

16

Jan 2015 May 2015 Sep 2015 Jan 2016 May 2016 Sep 2016 Jan 2017 May 2017 Sep 2017 Jan 2018

Household Industry Total


4

It will likely be difficult to meet the fiscal deficit target

Unlike inflation, Indonesia’s external balances are likely to take a hit because of the rise in global oil prices. The country, despite its hydrocarbon re-sources, is a net importer of oil and gas. Oil and gas imports grew 29.6 percent in 2017—Brent prices had gone up by 17.3 percent that year—a stark con-trast to a 22.7 percent decline in 2016. Although Brent prices have gone up by about 17.5 percent so far this year, growth in oil and gas imports has been rather muted (just 6.0 percent in Q1). This is likely

to change if oil prices continue to rise. Brent, for ex-ample, has increased 12.9 percent between the end of March and May 15. This, in turn, could dent the current account, which was at a deficit of 2.1 percent of GDP in Q1. The rise in oil prices will likely have another impact—the government’s subsidy bill, giv-en that it has decided to keep a lid on administered prices. This, in addition to pre-election spending and a continued policy focus on infrastructure, will likely ensure that the government misses its fiscal deficit target of 2.2 percent of GDP. Nevertheless, the rule of not letting the deficit breach 3.0 percent and hard-earned ratings upgrades will likely prompt the government to keep a check on public finances.

Foodstuff inflation

Figure 4. Rising global oil prices have not impacted inflation due to a lid on administered prices


Headline inflation and key categories (%, year over year)

-2

0

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Jan 2015 May 2015 Sep 2015 Jan 2016 May 2016 Sep 2016 Jan 2017 May 2017 Sep 2017 Jan 2018

Administered price inflation Headline inflation


5

1. Reuters, “Moody’s upgrades Indonesia’s sovereign rating to Baa2, changes outlook to stable,” April 13, 2018.

2. Reuters, “Fitch upgrades Indonesia’s rating to BBB, says economy resilient to shocks,” December 21, 2017.

3. Rumki Majumdar and Akrur Barua, Are emerging economies prepared as the global liquidity tap turns off?, Deloitte Insights, March 13, 2018.

4. Haver Analytics, sourced May 15, 2018.

5. Unless stated otherwise, all data has been sourced from Haver Analytics.

6. Bank Indonesia, Consumer Confidence Index, sourced from Haver Analytics on May 17, 2018.

7. Sara Schonhardt, “Fuel price increase had to happen: Jokowi,” Wall Street Journal, November 18, 2014; Akrur Barua, Indonesia: Some promising signs, Deloitte Insights, December 19, 2014.

ENDNOTES

AKRUR BARUA

Akrur Barua is an economist and a regular contributor to several Deloitte Insights publications. He often writes on emerging economies and macroeconomic trends that have global implications, such as monetary policy, real estate cycles, household leverage, and trade. He also studies the US economy, especially demographics, labor market, and consumers.

ABOUT THE AUTHOR


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CONTACTS

Akrur BaruaDeloitte ResearchDeloitte Services LPIndia+1678 299 [email protected]

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Consumer & Industrial ProductsTim HanleyDeloitte Services LPUSA+1 414 688 [email protected]

Energy & ResourcesRajeev ChopraDeloitte Touche Tohmatsu LimitedUK+44 7775 [email protected]

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