Indonesia: Demand normalisation brightens outlook
- Real GDP grew by 5%yoy in 4Q21, taking full year to 3.7%
- Drivers were broad-based, led by consumption and trade
- The strong momentum is likely to spill into this year, notwithstanding onset of the Omicron variant
- Pipeline pressures will keep inflation around the mid of the BI range this year
- Market implications: Global policy shifts are likely to dominate domestic tailwinds
The Indonesian economy expanded by 5% yoy in 4Q21, faster than consensus and our expectations, with sequential pace up 1.1%. Full-year 2021 GDP growth averaged 3.7% yoy vs our forecast at 3.6% and the government’s projection of 3.7-4.5%.
The Covid caseload had receded sharply in the last quarter of 2021, alongside a ramp-up in vaccination, allowing for looser social distancing measures. Mobility levels had improved, alongside pick-up in other activity indicators – confidence surveys, retail sales, credit growth, raw material, and intermediate imports, amongst others. This reflected normalisation in domestic activity, which coupled with a strong commodity-driven run-in exports translated into a firmer headline growth.
Under the hood, consumption expenditure added the most to headline growth, along with higher investment growth and net exports, even as the latter’s contribution moderated on higher imports. Under consumption, household, and government’s rose, with base effects adding to the yoy buoyancy. Gross fixed capital formation benefited from higher machine and equipment output, alongside IP products, besides inventory build-up.
Along expected lines, export growth quickened to 30% yoy in 4Q21, with higher commodity prices boosting earnings. The concurrent 29.6% rise in imports, however, narrowed the component’s contribution to headline growth.
On indexed basis (Dec19=100), headline growth extended its gains to pre-pandemic levels, with consumption also notably narrowing the gap.
Outlook: Our GDP Nowcast points to a pick-up in headline growth in 1Q22 (based on lead indicators).
Into 2022, the rising Covid case count is likely to have a shallower impact on the recovery outlook. After a receding case count, Indonesia’s Covid case load has surged in recent weeks, fanned by the highly transmissible Omicron variant. Authorities tightened mobility restrictions in Jakarta, Bandung, and Bali to the second-highest level on Monday, which includes limiting capacity at public places etc. for a week, as a start. While these curbs are likely to be reviewed regularly, we don’t expect the stringency to increase, in a bid to safeguard growth and health of the labour markets, learning also on the less virulent nature of this variant. Medical facilities (beds, oxygen supply etc.) is being ramped up amidst accelerating vaccination. The tourism sector is also being revived by way of travel bubbles/ vaccinated travel lanes with select countries, whilst also reopening key tourism centres like Bali.
The sharp acceleration in 4Q21 growth and resilience in 1Q yet far puts the economy on a stronger footing to brave the impact of the pandemic. Pent-up demand, a pickup in business activity especially contact intensive services, government spending and trade (to a smaller extent as imports rise), are behind our growth forecast of 4.8% yoy for this year.
On commodities, authorities have been keen to earmark sufficient supplies for domestic players amidst a sharp rally in global prices, in addition to the broader efforts to move up the commodity value chain by expanding presence in downstream industries.
As this strategy is revived, in the near-term, the trade surfeit could moderate, as demand revival also translates into higher import demand for raw materials and intermediate goods, which will see the current account balance return to modest red this year.
Inflation back in the BI range
January inflation firmed up to 2.2% yoy, back into the Bank Indonesia’s target range of 2-4% and fastest print since May20. Core inflation was up 1.8% yoy, firmest since 3Q20, fueled by demand normalisation amidst easing curbs.
Pick-up in price pressures was broad-based, contributed by higher food, clothing, utilities, household equipment, transport, and selected service categories. Besides seasonality around the year-end, price pressures are being driven by a combination of tradables, LPG non-subsidy price adjustments, housing rents as well as a return in normalcy in economic activity, notwithstanding the extension of administered prices (fuel and electricity tariffs).
Looking ahead, the upcoming increase in the value added tax rate, demand pickup, and imported pressures is likely to see headline inflation rise, averaging 3% yoy this year. Subsidy reforms or price adjustments will add to this upward momentum. Downside risks are two-fold: a) the evolving pandemic situation posts downside risks, but past few waves have had a diminishing impact on the sequential price trend, which is likely with Omicron as well; b) government’s support by way of further price support or administered measures (e.g., reinforcing the domestic market obligation (DMO) policy on coal, palm oils etc. to quell domestic prices.
Bank Indonesia meets later in the week, where the Governor is likely to emphasize on the need to be vigilant against a challenging global policy backdrop and tightening liquidity conditions. The BI has already initiated liquidity normalisation with first of the reserve requirement ratio hikes scheduled for March. Recent hawkish commentary has raised the risk of hikes being brought forward to 2Q22.
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