Is the Tree Shady Enough for Bird to Chirp Louder
Key Takeaways :
• Indonesia's 1Q23 GDP expanded +5.03%, in-line with our expectation, driven by higher consumption (+4.54% YoY) pointing the end of Covid era and thank's to bring back mobility policy and still higher exports volume despite plunging prices.
•Looking ahead private sectors may experience decelerating growth as we already observed corporate revenue growth slowing to 12.5% YoY in 1Q23. Reiterate a more conservative capex view given margin squeeze factoring the impact of higher inflation and borrowing cost beside hostile external factors.
•As Indonesia faces a dry season due to El-Nino, despite expect a less severe one, history has shown that drought could impede horticulture productivity. This in turn, to likely trigger higher inflation volatility (previous El-Nino came with the cost of 0.7x higher than normal prices volatility for shallots and chili).
•Given inflation trend gradually easing towards a desired level due to harvest season in 1Q23 and fuel price adjustment, going forward a proper formula to ensure sufficient supplies and distribution management are needed to avert the worst outcome that possibly derailing lower class purchasing-power.
•As we embark a political year, we estimated consumption boost will be +16.85% higher than in 2019 general election due to increasing quota of legislatives (+356), increasing province (from 34 to 38) and probability of 3 presidential candidates. The contribution is estimated to be around 0.7% FY23E nominal GDP.
• Historically, real output tended to slowdown ahead of election up until candidates were officially announced as well as the program offered. Indonesia's GDP could then rising again post election. However in the last 4 cycles of political contests, external macro factors also need to be taken into account, as the global economy facing a headwind due to tight monetary policy and US banking turmoil besides softening commodity prices.
• All in all, we maintained our conservative view on FY23E Indonesia's economic growth of below 5% (our estimate +4.87%) due to challenging momentum despite Indonesia still in the safe spot. Should the downside risks materialize of domestic fundamental revert substantially we think BI to likely opt for RR/policy rate cut and fiscal space to refocus on upholding purchasing-power which we have not seen it yet for now. Inflation to fall back at a desired level in the end of 3Q23 or possibly 4Q23 as high base effect and El-Nino season to come to an end.
MNCS Research
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