On 4 May 2016, Indonesia’s first quarter GDP growth data came in at 4.9% YoY, which was below consensus expectations of 5.1% YoY, and slightly down on the 5.0% YoY growth figure posted in Q4 2015.
The slowdown was mainly due to a decrease in government spending. Nonetheless, private consumption remained relatively strong. This data release may understandably raise questions about whether Indonesia’s recovery is flagging, but in our view, there are solid reasons for expecting the economy to remain firmly on its recovery path.
Softer Q1 GDP for now
The main reason for Indonesia’s economy growing slightly less than expected in Q1 2016 was a slowdown in government spending. This slowed to 2.9% YoY from 7.3% in Q4 2015, mainly driven by lower spending on social financing (down 35% YoY). Meanwhile, private consumption remained resilient.
Why do we believe Indonesia remains on a path of gradual recovery in 2016?
- Infrastructure spending was actually stable in Q1. This, in our view, is key to the economy’s recovery. Construction – with the largest share of total investment – remained quite stable at 7.87% YoY.
- Albeit at a slower pace than in Q4 2015, investment growth at 5.6% YoY in Q1 2016 was still ahead of the 5.1% growth seen in 2015.
- We believe there will be a solid rebound in government spending in Q2 GDP data as long as tax revenues pick up. An improvement in investment should be supported by lower interest rates, as companies consider investing more in an improving domestic environment.
Exhibit 1: Quarterly GDP from 2010 to 2016e (%)
Source: Bloomberg, May 2016.
We expect a gradual growth recovery led by more structural reforms.
- President Joko Widodo has pledged to deregulate the economy and accelerate infrastructure development.
- Since September 2015, 12 stimulus packages have been announced, mainly aimed at boosting the investment and business environment. The tenth package plays a strategic role by opening up sectors to foreigners.
- In our view, the key driver of GDP growth in Indonesia will also be domestic demand, led by the stimulus packages and the lag in the impact of Bank Indonesia’s (BI) monetary easing earlier this year.
Rebound in earnings growth
Q1 corporate results showed an earnings recovery, with positive results primarily in the consumer and telecommunications sectors, in which we are overweight. We expect a strong upward revision for earnings growth for 2016 and 2017, for a number of reasons:
- Lower inflation coupled with interest rate cuts should continue to boost private consumption spending in the second half of 2016.
- After three interest rate cuts in Q1 2016, BI left its rate on hold at 6.75% in April. Another rate cut may come later this year, in our view.
- Construction companies posted strong growth on the back of improved government spending implementation so far this year.
Exhibit 2: Expected rebound in earnings growth for 2016e and 2017e
Source: Bloomberg, May 2016. The estimates are our team’s estimates.
We expect even better earnings growth performance from companies in the consumer, real estate and utilities sectors. We focus on construction, which should benefit from faster infrastructure spending. We also favour the largest banks, supported by the current monetary easing cycle, and Indonesian consumers should also benefit from this virtuous cycle.
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