- Indonesia’s economic output rose 5.7% yoy in 3Q22
- Firm consumption, fixed capital formation offset slower public spend
- Inflation lift-off has been less severe than anticipated, but is likely to stay above target
- This is unlikely to deter the BI from raising rates further
- Onshore FX liquidity is under watch
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3Q GDP growth up 5.7% yoy
Indonesia’s economy expanded 5.7% yoy in 3Q22, fastest pace in more than a year and vs 5.4% in 2Q. Growth in the first three quarters of 2022 averaged 5.4%, tracking our full-year forecast. On the quarter, output rose by a slower 1.8% q/q, slower than 3.7% in the quarter before.
On indexed basis, all components are closing in on pre-pandemic levels, with overall growth as well as consumption demand extending gains in 3Q22. On four quarter moving average basis, headline GDP is 5.6% above Dec-19 quarter and consumption up 3%. Exports is a notable outperformer on the back of higher commodity prices, up 41% vs Oct-Dec19 levels.
The expenditure breakdown revealed a broad pick-up, led by domestic demand besides a strong goods export run. Consumption rose 4.3% yoy vs 4.2% in 2Q, with household expenditure rising 5.4%, whilst government consumption declined for a third successive quarter. Gross fixed capital formation jumped 5% vs 3.1% in 2Q, likely benefiting from still easy financial conditions and strong realised investment commitments. Higher investments into machine & equipment, as well as vehicles accounted for much of the rise, whilst flows into buildings and structures slowed. Exports notched a sharp rise of 21.6% yoy, but this was negated by a sharper pick up in imports of 23% (especially services).
Contribution of consumption remained strong, but investment spending added the most to the headline due to higher fixed capital spending and inventory restocking. Support from net exports slowed to 1.0 percentage point from 2.2ppt the quarter before.
Overall structure (on nominal GDP basis) of growth was largely stable, according to data from the statistics agency. Household final consumption expenditure accounted for a little more than half, at 50.4%, followed by the gross fixed capital component by 28.6%. Even as the share of exports (goods & services) rose to 26.2%, net exports was modest at 4.9%.
Under supply-side breakdown, services rose 15.7% yoy quickening from 11.6% in 2Q, besides a strong pick up in manufacturing (9.9% vs 9%), whilst agricultural output (likely due to inclement weather) slowed on yoy basis.
At the provincial level, Java Island remained the key contributor to overall growth, notching a share of 56.3% and growth pace of 5.76%yoy.
In all, cyclical boost from high commodity prices (partly negated by higher imports), rise in investments, restocking demand and resumption in service sector activity were key tailwinds for third quarter growth, helping to offset the dampening impact on real incomes from the hike in subsidised fuel prices. Authorities also provided directed fiscal support to low-income households besides extending regional public transport subsidies to cushion the fallout of higher fuel prices on purchasing power.
Factoring in a slight moderation in 4Q yoy growth (as suggested by our GDP Nowcast model for Indonesia), we maintain our full-year growth forecast at 5.4%. A comfortable growth backdrop provides the central bank the necessary headroom to focus on inflationary expectations and keep currency underperformance in check through further rate hikes. We expect policy rates to be raised to a terminal rate of 5.5% by end-year.
Heading into 2023, easing commodity price cycle, slower growth amongst key trading partners and passage of reopening gains will require public capex and investment growth to pick the slack to shore overall activity. Attention will also shift to the presidential elections in early-2024.
Inflation to be slower than previously anticipated
October inflation surprised to the downside, slowing to 5.7% yoy from 5.95% in September, two months since a significant hike in the subsidised fuel prices. On month-on-month terms, the index fell -0.1% after a 1.2% increase in Sep. Administered inflation (government controlled) stayed sticky at 13.3%yoy but volatile components rose by a slower 7.2%yoy.
Even as key segments impacted by the hike, i.e., transportation (12.4% weight) rose 16%yoy for a second successive month and energy up 16.9%yoy in Oct vs 16.5% month before, there were counterforces that helped to rein in the headline inflation, namely ongoing deflationary pressures in food. With the highest weightage, food & beverages slowed to 6.8%yoy in Oct vs 7.9% month before, owing to a fall in costs of perishables including eggs, chicken meat, besides cooking oil, cayenne & red peppers.
Pass-through of the hike in subsidised fuel prices has also been more gradual than earlier feared. While transportation inflation is elevated, regional subsidises and fiscal aid in selected cities including capital Jakarta, have helped to cap fares. Air fares have been on an upswing domestically, lending some upside pressure at the margin. In the meantime, the need for further adjustments in non-subsidised fuel prices has receded due to a moderation in global energy commodity levels.
Given the downside surprise in October’s prints, weaker second round impact and tepid year-to-date average of 4.0%, we lower our 2022 average inflation forecast to 4.2% from 4.6% earlier. We maintain our 2023 projection.
Separately, the government plans to increase excise duties on tobacco by an average of 10% in 2023 and year after, as well as apply the levy on e-cigarettes, as notably expenditure on cigarettes is the second-highest expenditure for Indonesian households, according to the local press.
Onshore dollar liquidity under watch
Bank Indonesia continues to tighten policy and we expect at least a further 75bp hikes before end-year. The US/ID rate differentials – policy rate as well as 10Y bond yields) have widened considerably on the back of aggressive US Fed rate increases. Concurrent to rate adjustments, the BI has also been intervening in the spot and non-deliverable forward markets to stabilise the currency. While domestic liquidity is ample, local FX liquidity has narrowed as strong export earnings are yet to return in toto to the onshore banking system. While returns on dollar deposits have increased significantly in the overseas markets, tracking higher US rates/ yields, local foreign currency deposit rates and, as a result, quantum of FX deposits are largely steady. Commercial banks have been cautious in raising FX deposit rates, partly also restrained by the 0.75% guaranteed rate for deposits under the Deposit Insurance Corporation. A stronger draw for exports earnings to be brought back to the onshore markets will be a source of cushion for the currency.
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