Indonesia’s GDP grows strongly in Q4 2015 on government spending

Indonesia's GDP grew 5.04% y/y in Q4 2015, more than Societe Generale's forecast of 4.5% y/y and consensus expectation of 4.8% y/y. Infrastructure investment, driven by government spending, boosted the economy; however, nothing else has changed much.

Government spending was the main growth driver in H2 2015. In Q4, government spending grew 7.3% y/y, resulting in the rapid rise in capital formation. Gross Fixed Capital Formation expanded 6.9%, the fastest since Q1 2013.

However, in spite of a stronger-than-expected growth rate, the entire 2015 growth was recorded at 4.8% y/y, the lowest since 2009. Domestic private consumption, which accounts for over 50% of the economy, continues to be weak. It was at 4.92% y/y, the fifth consecutive quarter of sub-5% growth. Weak manufacturing activity further worsens the issue.

With manufacturing productivity easing and wage costs continuing to rise at a rapid pace, several domestic firms are being compelled to shut shops, while foreign firms are shifting their production units to cheaper locations. This is expected to negative impact the nation's domestic consumption. However, a rise in public spending on infrastructure might help offset the blow.

Nominal GDP slowed to 9.23% y/y, the slowest since 1990. Indonesia recorded fiscal deficit of 2.76% of GDP in 2015. The nominal GDP is likely to remain weak in 2016 as commodity prices are unexpected to recover. The key to Indonesia's sustainable growth in the future will be in its capability to cut its reliance on commodities and rebound the share of manufacturing in GDP.

"We maintain that while the recent bout of reforms announced by the government is positive for the economy, the impact of these changes will only be felt over the medium to long term. As of now, despite the robust Q4 GDP print, we retain our yoy GDP growth forecasts of 5.2% and 5.4% respectively for 2016 and 2017", says Societe Generale.