Government spending lifts Indonesia's growth in Q2

Indonesia's second quarter GDP growth beat market expectations as it pegged at 5.18 percent. Consensus was for a reading of 5.00 percent while first quarter had posted a growth of 4.91 percent. The rise has more than made up for the disappointment in Q1 GDP data a few months ago.

The upside surprise in Indonesia’s economic growth has been driven by domestic demand, particularly the surge in government spending. Public consumption portion of GDP grew by 6.28 percent yoy in Q2, markedly higher than the 2.93 percent yoy posted in Q1.

Investment rose 5.06 percent y/y and household consumption by 5.04 percent y/y. A 5.06 percent y/y rise is not too bad in and of its own, given the global uncertainties, but is still lower than the 5.57 percent printed in the previous quarter. On the external front, exports contract 2.73 percent y/y.

The large capital inflows anticipated under the recently passed Tax Amnesty Program should push down bond yields and boost bank lending. Domestic demand should accelerate in H2, led by consumption and investment. Asset price inflation will be supportive of growth in the short term, but may become distortionary if left unchecked.

"As we do not believe Indonesia’s financial markets are deep enough to likely absorb amnesty inflows at this stage, the risk is that these inflows and excess liquidity leak from the financial sector to the real sector. In short, Indonesia could find itself with overly accommodative policy settings that are too supportive of growth sooner rather than later," said ANZ in a report to clients.