The outlook for Indonesia continues to be positive, as it looks likely to maintain its growth momentum supported by healthy domestic consumption, accelerating investment as well as improving shipments and external situation. Consumption, a key pillar of the economy, remains buoyant and sentiment continues to be strong. Also, exports are starting to pick up as foreign demand shows further signs of improvement. Inflationary pressures are also strengthening.
Indonesia’s Q3 GDP came in stronger than expected, with consumption, investment and net exports all outperforming. Buoyant domestic demand and improving foreign demand will be supportive of growth momentum going forward.
GDP grew 4.2 percent year-on-year in Q3 2009, an improvement over 4.0 percent (revised) in Q2. Private consumption grew 1.2 percent quarter on quarter seasonally adjusted while investment climbed by 3.5 percent. Exports and imports also accelerated, resulting in net exports rising by 39.8 percent year-on-year.
Consumption momentum remains strong. Retail sales grew 13.4 percent year-on-year in September from 5.3 percent in August, helped by increased consumption during the Idul Fitri. However, consumer confidence appears to have tempered. The consumer survey index fell to 110.0 in October from 110.8 in September led by lower expectations about future income and weaker employment conditions.
On the external front, exports fell 19.9 percent year-on-year in September from -15.4 percent in August while imports decreased 24.2 percent in September compared with -24.6 percent a month earlier. The trade surplus was US$1.3 billion in September, rising from $0.8 billion in Aug.
Inflation fell to a 5 year-low of 2.6 percent (y/y) for October, compared with 2.8 percent in September.
This was due largely to base effects of higher transportation prices. Inflation momentum continues to accelerate, rising to 6.8 percent three month on three month Seasonally adjusted and annualied .
BI left its benchmark rate at 6.50 percent in November, noting that the rate is consistent with its 5.0 percent (+/- 1.0 percent) inflation target for 2010 and is conducive for an economic recovery and financial intermediation.
Concerns over measures to stem short-term capital inflows to emerging markets weighed on the IDR, but we believe the likelihood of a tightening of capital controls in Indonesia is low. FX Concerns over possible capital controls hit the IDR in mid-November after Deputy Governor Hartadi Sarwono said the BI is studying the possibility of limiting foreign ownership in short-term BI debt (SBIs) as a “precautionary measure” to curb hot money flows.
While the central bank stressed that there are no plans to tighten capital controls, market participants are wary of additional curbs following recent measures in other emerging economies such as Taiwan.
We believe the likelihood of controls in Indonesia is low as:
First, IDR strength is consistent with BI’s preference.
Second, there are no alter-native liquid IDR-denominated instruments.
Third, aggregate non-resident holdings of Rp 47 trillion account for only 19.6 percent of outstanding SBIs.
Into 2010, IDR should continue to benefit from sustained risk appetite, relatively strong fundamentals and attractive yields. However, the pace of IDR gains is likely to slow as growth differentials with the more open AXJ (Asia Excluding Japan) economies narrow, and domestic inflation expectations rise in tandem with economic momentum. We continue to expect the 9,000 and 9,500 levels to define the range of trading in USD-IDR during 2010.
BI left policy rate unchanged at 6.50 percent on Nov. 4 and signaled that the central bank is not in a hurry to hike rates. We continue to expect the BI to tighten monetary policy in Q2 2010. Inflation risk has appeared on the BI’s radar screen, and recent central bank commentary suggests the BI now sees inflation skewed to the upside of its forecast of 4 percent to 6 percent in 2010.
Structurally, IDR bonds should continue to benefit from attractive yields and the eventual achievement of investment grade status. Such cross-winds will make conditions choppy in IDR local rates markets.
We continue to suggest a neutral allocation in IDR bonds.The writer is ANZ Chief Economist, Asia.