Overall, market participants are satisfied with Indonesia's economic growth in the first quarter of 2017. Indonesia's Statistics Agency (BPS) released the nation's official first quarter gross domestic product (GDP) data on Friday (05/05). It showed a 5.01 percent year-on-year (y/y) growth pace in Q1-2017, in line with - and even above some institutions' - expectations. Moreover, the figure confirms that Indonesia's economic growth continues to accelerate. In the first quarters of 2015 and 2016 GDP growth was recorded at 4.71 percent (y/y) and 4.92 percent (y/y), respectively.
Most market participants seem satisfied with Indonesia's Q1-2017 GDP growth figure, reflected by a strengthening Jakarta Composite Index. Indonesia's benchmark stock index started in the red on Friday morning because a significant decline of commodity prices dented investors' risk appetite, hence dragging down stocks across the globe. While most main Asian bourses fell, Indonesia bucked the trend, supported by the latest GDP data. The Jakarta Composite Index was in the red for the first hour of trading on the last trading day of the week but recovered after the GDP data were released. At the end of the day the benchmark index had risen 0.25 percent to 5,683.38 points.
But despite Indonesia's Q1-2017 GDP data meeting most investors' and analysts' expectations, there is some reason for concern when we take a closer look at the data.
Read more: Indonesia's Official Q1-2017 GDP Data
Firstly, Indonesia's improving export performance in the first quarter of the year is cited as the key source of growth, expanding 8.04 percent (y/y). Although the nation's improving export performance is partly brought about by recovering demand in its key export markets, there is also another factor at play here, namely the recovering commodity prices.
Indonesia is among the globe's largest commodity exporters (specifically coal, crude palm oil, rubber and nickel). This is a major strength of the Indonesian economy. However, in the case of Indonesia it also entails a weakness because the nation is highly dependent on exports of raw commodities. Considering Indonesia's manufacturing industry and smelting capacity are underdeveloped, it implies the Indonesian economy is closely linked to (and dependent on) volatile commodity prices. In the 2000s this was a blessing amid the commodities boom and therefore the Indonesian economy started to grow at +6 percent (y/y) levels. However, when this boom ceased, the pace of Indonesia's economic growth declined rapidly.
The government is therefore eager to boost investment in the manufacturing industry, while encouraging (or forcing) miners to develop smelting facilities in order to become an exporter of manufactured products or value-added commodity products. This strategy will reduce the economy's link to volatile commodity prices and give rise to a higher degree of "structural" economic growth.
However, based on the latest GDP data from BPS, Indonesia's manufacturing sector only expanded 4.21 percent (y/y) in Q1-2017, significantly below the nation's overall macroeconomic growth of 5.01 percent (y/y). Manufacturing now accounts for 20.47 percent of Indonesian GDP, down from a figure of 21.05 percent in the same quarter one year earlier, meaning its role toward the economy has actually declined. Exports, on the other hand, saw its contribution to the Indonesian economy expand from 19.03 percent of GDP in Q1-2016 to 20.50 percent in Q1-2017.
With recovering commodity prices being cited as main reason why Indonesia managed to see a growth pace of (slightly) more than 5 percent in Q1-2017 while growth of the manufacturing industry was disappointing, Indonesia will have trouble pursuing structural accelerated economic growth in the next couple of quarters.
The central government should be disappointed by bleak manufacturing growth after having released various economic policy packages in 2015 and 2016 that were partly aimed at boosting investment in manufacturing through deregulation and fiscal incentives. However, it should also be emphasized that investors were very cautious in Q1-2017 due to rising religious and ethnic tensions in Jakarta related to the blasphemy case of incumbent Jakarta Governor Basuki Tjahaja Purnama (better known as Ahok) and Jakarta's 2017 gubernatorial election. Considering these tensions have largely disappeared after Ahok was defeated in the election, the investment and business climate of Indonesia should become more attractive in the remainder of the year. Hence, we should see improving foreign direct investment realization starting from the second or third quarter.
Indonesia's Quarterly GDP Growth 2009-2017 (annual % change):
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Source: Statistics Indonesia (BPS)
Poll Indonesia Investments:
Are you satisfied or concerned about Indonesia's Q1-2017 GDP?
Voting possible: -
- I am concerned (48.6%)
- I am satisfied (40%)
- I have no opinion (11.4%)
Total amount of votes: 35