On the back of weak government expenditure, Indonesia’s 1Q15 GDP growth decelerated to 4.71% y-y, down 0.18% q-q, (4Q14: 5.01% y-y; 1Q14: 5.14% y-y), its lowest level since 3Q09 and well below market expectations (Exhibit 1). In 1Q15, government expenditures only grew 2.21% y-y (1Q14: 6.12% y-y), followed by private consumption growth of just 4.53% y-y, flat q-q. 

Exhibit 1: GDP Growth, 3Q09 - 1Q15

Source: Statistics Indonesia, Bahana

1Q15 private consumption growth, the main economic growth contributor (58% of total 1Q15 GDP), only reached 4.46% y-y (4Q14: 4.53% y-y; 1Q14: 5.61% y-y), as shown in Exhibit 2, mainly due to lower purchasing power as a result of lower commodity prices coupled with fuel price hikes in 1Q15.  

Exhibit 2: GDP by Expenditure (% y-y)

 

Source: Statistics Indonesia

In line with our market findings, most sectors experienced deceleration (Exhibit 3), led by mining and quarrying (-2.32% y-y), which suffered from low commodity prices. This was followed by accommodation and F&B activities, which only grew 3.56% y-y, consistent with weakness seen in our consumer companies. However, the telco, insurance/financial services and real estate sectors bucked the trend, displaying growth acceleration on a y-y basis.   

Exhibit 3: GDP Growth by Industry, 1Q15 (% y-y)

 

Source: Statistics Indonesia

Although imports decelerated 2.20% y-y and paved the way for a trade surplus in 1Q15, external trades were not sufficient to support economic growth, as exports dropped 0.53% y-y on lower commodity prices and weak global demand conditions.

Compared to a slowdown in exports, weak government expenditures and a decline in private consumption, investment realization performed relatively better, expanding 4.36% y-y (1Q14: 4.66%) and providing some cushion for the economy. 1Q15 investment reached IDR125tn (24% of the 2015 full-year target), reflecting growth of 16.9% y-y and 3.5% q-q.

We think the weak GDP growth seen in 1Q15 is likely to persist into 2Q15. Recent PMI data point towards a weak manufacturing outlook, with a level of 46.7 in April, the seventh straight month of contraction. At this stage, we believe an economic rebound could only occur in 3Q15 at the earliest. We note that, based on data from the Ministry of Public Works, only around 32% of infrastructure tenders were awarded in 4M15, far behind President Jokowi’s plan of finishing all tenders by March of this year.

Given current slower-than-expected government projects, lower commodity prices and the relatively unexciting private consumption trend, we are of the view that the central bank may be forced to cut its benchmark rate by 25bps to 7.25% in 2Q15 (BOG meetings: 19 May and 18 June) to support economic growth. As a result, we forecast 2015 GDP growth to reach 5.02% y-y (previous estimate: 5.29%), before improving to 5.28% y-y in 2016, although at a lower level compared to our previous estimate of 5.74%.

At this stage of the cycle, we believe that the prospect of improved GDP growth would provide the equity market with much-needed support for improved performance, particularly on participation by foreign investors which would help to prop up the IDR despite lower interest rates.