Bank DBS Indonesia: GDP growth holds steady at the beginning of 2023

Highlights

The Indonesian economy expanded 5% yoy in 1Q23, along our forecast. This compares with average 5.3% growth last year. On sequential basis, the pace contracted -0.9% vs 0.4% in 4Q22

On indexed basis, headline GDP is up 8% from late-2019 levels.

Amongst the provinces, Java Island continues to dominate with a 57.2% share in overall output, with growth easing to 4.96% yoy. Sumatera (21.8%), the second largest, grew 4.8%, followed by Kalimantan (9% share) up 5.8%. The resource-intensive provinces benefited from higher commodity-related activity as well as loosening of restrictions in Dec22

Expenditure side

Overall consumption rose 4.5% yoy in 1Q23 vs 3% in the quarter before, whilst investment growth slowed to 2.1% vs 3.3% earlier. Export growth slowed to 11.7%, softest since Mar21, but net exports contributed to the headline as imports growth was the slowest since late 2020. Amongst the various sub-components, consumption contributed 2.7ppt and net exports 2.1ppt – accounting for much of the lift. Household consumption rose as the impact from above-target inflation was likely partly offset by the upcoming wage adjustments, loosening of movement restrictions and then upcoming festivities.

Industry side

Amongst the components that fared well were - Transportation and Storage up 15.9%, followed by Accommodation and Food Service Activities at 11.6% yoy and other Services Activities at 8.9%. Manufacturing which has a dominant contribution, grew by 4.4%

DBS Report: Indonesia: Rate policy to pivot, fiscal off to a strong start

A supportive growth report adds to the central bank’s comfort. Yet easing inflation and strong rupiah will be bigger drivers of policy action.

With energy prices off last year’s elevated levels, negligible risk of further subsidy fuel price adjustments and administrative measures to prevent any dislocations in food segments, inflationary expectations are broadly anchored. Evolving trends point to the likelihood of a shift in BI’s leaning in the coming months, with the policy to pivot towards rate cuts this year, rather than 2024.

We bring forward our rate cut expectations, starting in Aug23 vs previous early-2024, with risks skewed towards an earlier start rather than later. Policy rate is expected to settle at 4.75% in 1Q24.

This would see the BI stand out as the amongst the last to start rate hikes in the region, and amongst the first few to return to the easing cycle.

Radhika Rao, Senior Economist, DBS Group Research

About DBS

DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.

Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 14 consecutive years from 2009 to 2022.

DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets. DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting social enterprises: businesses with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping communities with future-ready skills and building food resilience.

With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.