Indonesia January 2014
Indonesia
2014: watch this space
2013 has been a tough year because of the sudden capital outflows seen in the summer, which highlighted Indonesia's
external vulnerability. At the same time, economic growth has slowed to 5.8% in the first three quarters of the year and our
full-year 2013 forecast has been cut to 5.5% vs. 6.2% in 2012. To combat inflation and stabilise its external position,
Indonesia's monetary authorities have sensibly decided to tighten monetary policy, and this is likely to continue. The risks
to growth and external liquidity are increasing, but remain manageable.
■ Economic growth revised downward
Economic growth continued to slow to 5.6% year-on-year in
Q3 2013, the slowest rate since 2009, compared with 6.2% in
Q3 2012. On a quarter-on-quarter annualized basis, real GDP
growth has remained around 5% since the start of the year.
Domestic demand is still solid, supported by investment and
consumer spending. However, investment by foreign
companies continued to fall, coming in down 0.5% year-on-
year versus an increase of 12.8% in Q3 2012. The net
contribution of foreign trade to growth remained resilient at 1.1
point of GDP versus -1.2 points in Q3 2012. Export growth
accelerated to 5.3% year-on-year, with growth particularly
strong outside the oil and gas sector. Import growth also
accelerated to 3.8% year-on-year, with commodity imports
especially firm. However, the growth outlook is continuing to
weaken. Growth is unlikely to exceed 5.5% in full-year 2013,
before slowing to 5.3% in 2014.
The 44% jump in Indonesia's minimum wage this year has
helped consumer spending withstand price rises and tougher
monetary conditions. However, consumer spending is likely to
slow from Q4 onwards.
Growth in business investment (excluding inventories) is
expected to continue falling, although production capacity
utilisation remains high. Tighter monetary conditions and the
greater difficulty of refinancing in dollars will make it harder for
companies to raise debt.
Exports are likely to remain relatively weak, as suggested by
the latest export order indicators in PMI surveys (49.1 in
November). Indonesia mainly exports to Asia, where the
recovery is not yet strong enough to give its exports much of a
boost.
■ Inflation pressure still strong
The June 2013 hike in fuel prices - with petrol up 44% and
diesel up 22% - resulted from the weaker rupiah, and caused
a sharp rise in consumer price inflation (8.3% in October
versus 5.5% in May). So far, businesses have only passed on
a small proportion of the higher cost to customers, as shown
by the limited increase in prices excluding energy and food
(4.7% in October vs. 4% in May). However, the monetary
authorities are likely to continue tightening monetary policy,
24
1- Contribution to economic growth
Percentage point (pp)
▐Consumption ▌GFCF ▌Public expenditures
▌Net exports ▬ GDP (y-o-y, %)
10
8
6
4
2
0
-2
-4
2009 2010 2011 2012 2013
Source: CEIC
after 175bp of rate hikes since June, since real interest rates
remain negative. The priority for the monetary authorities is to
control inflation and strengthen Indonesia's external position.
■ External position proving difficult to restore
In Q3 2013, the current account deficit shrank slightly to 3.8%
of annualized GDP, versus 4.4% in Q2 and 0.5% in the last
five years. This very slight improvement was driven by the fall
in the trade deficit. However, the situation remains fragile, due
in particular to Indonesia's excessive dependence on
commodities.
The country's trade balance, which has shown a surplus of
over 3% of GDP in the last five years, is now struggling to
break even. Indonesia remains structurally over-dependent on
exports of commodities, the prices of which have fallen
significantly in the last two years, particularly in the case of
coal and palm oil. The deterioration in the country's external
position is due to a sharp fall in the trade surplus excluding oil
and gas, along with a constantly widening trade deficit in oil
and gas (1.3% of GDP in Q3 2013 despite the June 2013
measures to raise energy prices). Unfortunately, the
worsening in Indonesia's terms of trade since 2011 - caused
by a fall in exported commodities and higher prices of
economic-research.bnpparibas.com
 Indonesia January 2014

imported energy - is unlikely to be reversed in the next few
quarters.
However, the current account deficit could fall slowly. Imports
could fall because of slower growth in domestic demand and
tight monetary policy, while exports will receive only limited
support due to weak growth in the rest of Asia. The current-
account deficit could amount to 3.5% for the whole of 2013,
versus 2.8% in 2012. In addition, the rise in competitiveness
resulting from the decline in the rupiah's real effective
exchange rate, together with lower imports, should restrict the
deficit to less than 3% of GDP in 2014.
Although Indonesia's current account deficit is smaller than
India's, it is more problematic for two reasons. Firstly, and for
the third straight quarter, capital inflows were not enough to
cover the country's borrowing requirement in Q3. In Q3, the
balance of payments showed a deficit equal to 1.2% of GDP,
up 0.1 points relative to Q2. Secondly, foreign exchange
reserves now cover only 58% of Indonesia's borrowing
requirement.
However, Indonesia is less dependent on volatile capital flows
than India. Foreign direct investment remains the main source
of funding for the current account deficit. In Q3, foreign direct
investment continued to rise to 2.3% of GDP, versus an
average of 1.6% in the last four years. In the first nine months
of 2013, FDI was up 30% year-on-year, and it is likely to
remain firm in 2014. However, there is less certainty about
portfolio investments.
it appears that investment in government bonds has
accelerated, while net investment flows into equities have
remained negative. On December 1st, foreign investors owned
32.3% of Indonesia's government bonds, up from 31% on
September 1st. In late August, the minimum period during
which foreign investors are required to hold bonds issued by
the central bank was reduced by six months, and this probably
pushed up foreign investment.
In the short term, measures taken by the authorities to reduce
intervention in the forex market and raise interest rates should
reduce pressure on the balance of payments. The government
could also increase export quotas, particularly on coal, in
order to support the trade balance.
However, the summer's large-scale capital outflows merely
reinforced one of Indonesia's structural problems, i.e. the
need to diversify exports in order to reduce its dependence on
commodities.
Johanna Melka
johanna.melka@bnpparibas.com

Net portfolio inflows equalled only 0.8% of GDP in Q3 2013,

vs. 1.5% in Q2. Fortunately, portfolio flows have never been a
major source of funding for Indonesia's current-account deficit,
and have always been smaller than FDI flows. Nevertheless,
they have averaged 0.9% of GDP in the last four years.
Foreign investors have always been fairly risk-averse when it
comes to Indonesia, particularly equity investors. Since
September, based on movements in certain capital flows data,
2- Current account balance
xxxxxxx
As % of annualized GDP Economic forecasts
▌Oil and gas trade balance ▐Trade balance excluding oil and gas
2012 2013f 2014f 2015f
▌Income ▌Services ▬ Current account
8 Real GDP grow th (%) 6.2 5.5 5.3 5.5

6 Inflation (CPI, y ear av erage, %) 4.3 7.5 6.0 5.0

Gen. Gov . balance / GDP (%) -1.8 -2.5 -2.2 -2.0
4
Gen. Gov . debt / GDP (%) 24.0 25.6 26.0 25.4
2
Current account balance / GDP (%) -2.8 -3.5 -2.5 -2.3
0 Ex ternal debt / GDP (%) 28.7 29.8 30.1 27.3
-2 Forex reserv es (USD bn) 105 90 92 97
-4 Forex reserv es, in months of imports 5.4 4.7 4.6 4.5

-6 Ex change rate USD/IDR (y ear end) 9 638 11 900 12 000 12 400

f: BNP Paribas forecasts
-8
2009 2010 2011 2012 2013
Source: CEIC

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