Turning Point?
New national accounts data brings encouraging news: though below consensus expectations, growth in Q3 was higher than in Q2. This is at least anecdotal evidence of a possible turnaround, especially if the trend persists.
Growth was reported at 4.73% in Q3, up from 4.67% in Q2, though still down y/y. Though the board has reported the facts correctly, it seemed to undervalue the importance of this turning point.
The upturn was has also been accompanied by improvement in the current account deficit. The CAD narrowed to about $4 billion, or 1.9% of GDP, in Q3. But, due to the lower surplus in the capital and financial accounts, the BOP showed a deficit of around $4.57 billion, which led FX reserves to fall to $101.7 billion.
The smaller CAD was driven by a more robust trade balance, which has showed trade surpluses for the past 10 months. Trade continued to post a $1 billion+ surplus in October, due to the fall of imports, though exports were also lower that month.
Consumer price indices showed deflation of 0.08% in October, putting y/y inflation at 6.25%. Ytd inflation was at 2.16%. We expect 2015 inflation to be on the lower end of the Central Bank’s 4% + 1% target range.
The economic landscape is slowly changing, to become more positive. Bank Indonesia’s optimism, even before the release of the national accounts data, has proven correct (even though the growth rate reported by the Central Board of Statistics was somewhat lower than expected).
We project overall 2015 GDP growth at between 4.8% and 4.95%. Infrastructure development will start accelerating in 2016, with work beginning on the Trans Java toll road. Other toll roads are also being built, in North Sumatera, Kalimantan and Sulawesi, most based on public-private partnerships linked to concessions of about 30 years.
Other infrastructure projects, such as power plants, dams and irrigation projects, and ports and airports, are being built in a massive way, all over the country. All of this investment, from both the public and private sectors, will certainly produce multiplier effects. So we can predict with more confidence that national economic growth may reach 5.2% to 5.5% in 2016. Nor would we be too surprised if the growth rate is even higher than predicted in 2015. Such optimistic predictions should also be accompanied by relatively modest inflation of about 4%, while the CAD may not be far from current levels.
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