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ECONOMIC UPDATE – GDP - Investment driven growth


Investment driven growth


1Q18 GDP growth came below our expectation

According to statistics office (BPS), GDP growth in 1Q18 reached 5.06% YoY with quarterly growth came in at -1.70% QoQ. This came below both our estimation and Bloomberg consensus (see table on left).


Investment still the main driver

Investment had 7.95% YoY growth or the highest one since Joko Widodo took the presidential office. Investment growth in buildings eased to 6.1% YoY (4Q17: 6.68% YoY), in line with weakening growth of cement consumption at 6.5% YoY (4Q17: 9.3% YoY). However, other component of investment experienced rapid growth like machine and equipment (1Q18: 23.7% YoY; 4Q17: 22.3% YoY) and also vehicle (1Q18: 14.4% YoY; 4Q17: -2.7% YoY). Higher growth of these two segments confirmed the higher capital goods import at 27.7% YoY in 1Q18. According to BKPM’s investment realization data, new investments (FDI and DDI) mostly came to real estate, industrial park and offices (Rp 27.6 tn, 14.9% proportion) and also Machinery & Electronic Industry (Rp 22.7 tn, 12.3% proportion). This is a good sign that top investments in Indonesia started to shift from primary sector, like mining, to manufactures and services industries. However, we still put some concerns on labor absorption of those investments which was still low compared to previous 5 years (except 2017). Although BPS revealed unemployment rate was down to 5.13% in February, the composition of full time labor declined from 69.9% in Feb-17 to 68.5% in Feb-18. Low labor absorption from these investments may restrain the effect of higher investment to consumption in near future.


Stagnant consumption restrained the uptrend of growth

The uptrend of investment could not be followed by consumption sector which had stagnant growth at 4.95% YoY, just slightly below our estimation of 4.96% YoY. Rising food inflation in 1Q18 (5.15% YoY) gave pressure on food consumption growing only 5.12% YoY (1Q17: 5.24% YoY). Furthermore, consumption for transportation and communication was also remain weak at 4.92% YoY, far below 5-year average at 5.56% YoY. We still see it as the effect of weakening tourism arrival, especially through air transport which only grew 0.91% YoY in 1Q18. Stagnant consumption is tend to be seen from middle lower segment as seen from RALS same store sales growth (SSSG) at 0.3%  YoY in 1Q18 (1Q17: 1.0% YoY) and UNVR 1Q18 revenue which was down -0.9% YoY (1Q17: 8.6% YoY). However, middle upper segment showed better data as reflected by ACES SSSG at 13.8% YoY (1Q17: 5.1% YoY). We believe further fiscal stimulus is needed to boost middle lower consumption, especially approaching Ramadhan and Lebaran festive.


1Q18 GDP by sectors: Late harvest dragged down agriculture down

Previously, chief economic minister, Darmin Nasution, predicted that late harvest will drag down growth in 1Q18 but it will be compensated in 2Q18. It is denoted in agriculture GDP data which only grew 3.14% YoY, much below 1Q17 growth (when the harvest season was in March or 1Q17) at 7.1% YoY. Considering average growth of agriculture sector at around 5% YoY in 1H17 in last five years (2016 is excluded due to weather anomaly), agriculture sector growth may reach 6.5% in 2Q18. Industry wise, the main source of growth was still came from manufacturing sector which posted stagnant growth at 4.50% YoY, followed by construction sector with 7.35% YoY. Meanwhile, information and communication sector still had the highest growth at 8.69% YoY.


Maintain 5.3% GDP growth in 2018

Despite disappointing 1Q18 growth result, we still maintain our view of 5.3% GDP growth in 2018. Investment will still become the main driver of growth at around 7.4% YoY. Government infrastructure development and structural reform started to bear fruits as the current investment has shifted from primary sector like mining to manufactures and services. As of consumption, we don’t think that it may meet our target of 5.06% growth in 2018 even though we expect improvement in following quarters. We revise down our export target to 7.3% and revise up our import target to 10.5% due to better outlook for domestic investments. We will review our stance for Rupiah soon in our monetary review in mid May.