Indonesia: A sharp rebound in 2Q21 GDP

Indonesia expanded a strong 7.1% y/y in 2Q21, after four consecutive quarters of contraction.
Radhika Rao05 Aug 2021
  • Indonesia expanded a strong 7.1% y/y in 2Q21, after four consecutive quarters of contraction
  • Low virus count and base effects allowed for domestic demand to prop up growth
  • 2H outlook will be dictated by the duration and intensity of the current Covid wave
  • Implications for markets: Rupiah and bond yields take a breather on easing US pressure points
Photo credit: Unsplash

2Q21 GDP rebound on base effects and lower Covid count

Indonesia registered a strong 7.1% y/y growth in 2Q21, vs -0.7% in 1Q and after four consecutive quarters of decline. This took 1H growth to 3.2% y/y. A lower Covid case count, light movement restrictions, Ramadan festivities and base effects (2Q20 -5.3% y/y) helped prop the headline.

Amongst the drivers, the crucial consumption segment expanded 6.2% y/y. Fixed capital formation growth was strong at 7.5%. These two components contributed to over 80% of overall growth (see chart below). While there was a drawdown in inventory, net exports continued to contribute to the headline.

Under consumption, there was a pick-up in both government and household demand, with the pace magnified by base effects. Delving deeper, our calculations pointed to higher discretionary and non-discretionary spending in the quarter. Under investments, there was a broad improvement amongst the sub-segments: machine & equipment, vehicles, buildings, structures and other equipment. The commodity price upcycle helped prop up the external sector performance.

Speedbump ahead

The economic outlook for the rest of 2021 is highly dependent on the evolution of the pandemic and the effectiveness (and scale) of support offered by the authorities.

Since late June, Indonesia has experienced a sharp pick-up in infection cases (read Indonesia/ Thailand: Bumpy road to recovery and Indonesia: In pandemic firefighting mode). The daily caseload has since peaked at around 50k in mid-July and is hovering at 35k this week. Notably, while the Java island was accounted for more than two-thirds of the daily total case count until mid-July, these now make about 45% of the total, suggested that areas outside of Java face a rising count in the past fortnight. Concurrently, the absolute number of fatalities has ebbed but remains high by historical levels.

With the government imposing and extending PPKM restrictions this month, 3Q growth momentum is likely to hit a speedbump on slower consumption, while government support and exports fare better. The stricter Level 4 remains in place in economically crucial Java, which needs most non-essential workers to work from home fully, and except selected essentials (groceries, pharmacies), malls, entertainment venues are closed. Early high frequency data, including mobility indicators and manufacturing PMI, provided an indication of the adverse impact of the stricter movement curbs. Vaccinations are ongoing, with the average daily doses administered improving from 500k in June to over 800k in July, with 1mn dispensed for a few days. About 18% of the population has received at least one dose. As more vaccine supplies (Moderna, Pfizer, etc.) are made available, the pace is likely to improve to the targeted rate of 2mn/ day.

Our updated GDP Nowcasting model points to sequential q/q deceleration in 3Q21 before the pace stabilizes in 4Q provided the Covid caseload is brought under control, and vaccination rollout remains apace. We maintain our full-year growth forecast at 3.5% for 2021, before a likely improvement to 4.5% next year.

Policy levers in accommodative gear

Bank Indonesia is expected to maintain the policy rate at 3.5% for the rest of the year while signaling its pro-growth bias via moves to spur lending, macroprudential measures and ensuring stable financial markets (rupiah and bonds). Fiscal policy is likely to do more of the heavy lifting this year, with allocations under the national economic recovery program already increased to IDR774.7trn, up 29% vs 2020 allocations. Indications are that the health budget might be raised to IDR300trn vs IDR215trn presently, which might push up the overall stimulus spending. In the first half of the year, the deficit remains well contained at -1.7% of GDP, however, a reprioritisation of expenditure might be necessary if fiscal support is scaled up to defend downside risks to growth. Longer-out, the ability to contain public debt levels, introduce revenue-enhancing measures and reverse the rising share of interest payments vs overall revenues will be necessary to mend public finances materially.

On the markets front, rupiah and bond yields are off their low points, taking a breather as US 10Y yields have pulled back as well as US$ is off highs. Domestically too, recent auctions for IDR bonds have attracted strong interest, encouraged by signs that the government will cut back on the 20201 net debt issuance by tapping unspent cash balances, besides contained inflation and fiscal concerns.

To read the full report, click here to Download the PDF.

Radhika Rao

Economist – India, Indonesia, Thailand & Eurozone


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.