Bahana Macrosight: Deeper GDP slowdown ahead

To see the full version of this report, please click here

Summary:

·         Indonesia recorded -2.19% y-y GDP growth in 4Q20

·         Consumption and investment slowdown likely to persist in 2021

Slightly better than expected GDP growth

Indonesia’s 4Q20 GDP growth stood at -2.19% y-y and -0.42% q-q, slightly better than the consensus estimate of -2.3% y-y. This took full-year GDP growth in 2020 at -2.07%, the lowest since the Asian Financial Crisis of 1998. Most of the indicators show that Indonesia is yet to fully recover from the Covid-19 crisis and there was little evidence of pent-up demand that emerged in countries that contained the virus efficiently, such as China. From the expenditure side, in 4Q20 almost all the components were in negative territory on a y-y basis such as household consumption (-3.61%), investments (-6.15%), exports (-7.21%) and imports (-13.52%), with the only exception here being government spending (1.76%). From the production side, the economy in 4Q20 was supported by the farming, agriculture & fisheries sector (2.59% y-y); while the laggards were manufacturing (-3.14%), trade (-3.64%), construction (-5.67%), mining (-1.20%), and transportation & warehousing (-13.42%). For the GDP outlook, it is worth noting that Indonesia actually saw lower reported Covid-19 cases in October-December compared to January-February, and our concern here is the recent spike in daily cases will weigh on consumer and business confidence in 1Q21.

High frequency indicators point to sluggish growth momentum

There are strong reasons to believe a technical recession, indicated by negative y-y growth, may continue in 1Q21. On household consumption, January retail mobility has pulled back to the lowest level since September due to the recent spike in Covid-19 cases (retail mobility was even lower now compared to in 2Q20 for some major provinces such as West Java, East Java, and South Sulawesi). On investments, there were some notable worse-than-expected contractions as construction sector growth stood at -5.67% y-y (3Q20: -4.52%) with building investments growth, the largest component in gross fixed-capital formation, hitting -6.63% (3Q20: -5.60%). On exports, the recent pullback in prices of commodities such as coal & palm oil may somewhat drag recovery momentum, and Indonesia may not benefit much from the recent boom of technology manufacturing exports given its low exposure to the global supply chain. On government spending, the growth of which already decelerated to 1.76% in 4Q20 from 9.76% in 3Q20, the status quo will be likely maintained in the January-March period when a sluggish fiscal disbursement rate is the norm as government agencies are still adapting to the new 2021 budget.

Downward revision for our FY21 GDP growth forecast to 4.3%

We revise down our FY21 economic growth forecast from 5.0% earlier to 4.3% (IDR11,187tn in real GDP). We expect the economy to record -0.85% growth in 1Q21, before accelerating to 7.82% in 2Q, 5.93% in 3Q, and 4.57% in 4Q – mostly because of the low-base basis given the negative real growth in the last three quarters of 2020. Our 4.3% GDP forecast in FY21 is based on the assumptions: 1) flattening Covid-19 cases and no lockdowns imposed after 1Q21, 2) vaccination program will progress as targeted by the government, with 46% of the population already receiving vaccines by the end of 2021, 3) economic activities have improved, though not yet returned to normalcy/full capacity. In 2021, we expect government spending, mostly in the form of social assistance funds, to continue supporting household consumption. However, given the weak building and construction growth recently, we turn more cautious on investment, which may remain under pressure despite the upsizing of the infrastructure budget in 2021 and the planned execution of Omnibus Law & Sovereign Wealth Fund. The recent downturn in people’s mobility in January (see our previous report: Second wave of liquidity rally) should concern Bank Indonesia, which initially expected positive y-y growth in 4Q20, and our view here is the central bank in 2021 still has space to opportunistically cut rates by 25-bps to 3.50% should the risk-on mood return.