Indonesia: A Mixed Bag Amidst Global Headwinds
Indonesia continues to exhibit a mixed performance in 2023 given its latest growth and external sector statistics. While the first quarter of 2023 showcased resilience in certain areas of the economy, concerns surrounding weakening global demand and fluctuations in commodity prices continue to cast a shadow over the nation's economic outlook. A rebound in tourism alongside sustained domestic consumption levels have prompted an upward revision to our real GDP growth forecast to 4.9% y/y from 4.6% y/y, previously for 2023.
Figure 1: Indonesia Real GDP Growth (%)
Source: BPS
According to data released by Statistics Indonesia, the country's real GDP expanded by 5% y/y in Q1. This growth rate exceeded both market expectations and our own forecasts, demonstrating Indonesia's ability to navigate challenging global conditions. However, a closer look reveals a gradual cooling of growth in the second and third quarters, primarily due to an anticipated slowdown in external demand. On a sequential basis, growth contracted by 0.9% q/q. Indonesia's stellar external sector performance, driven by robust goods exports in 2022, is showing signs of waning. Although, global commodity prices remain historically high, weakening global demand has led to a decline in exports, contracting by 1% q/q. Notably, non-oil and gas exports, including coal and palm oil, experienced a 1.7% contraction on a quarterly basis. In April alone, Indonesia’s trade surplus nearly halved to $3.9bn (falling 47.9% y/y).
Figure 2: Export and Import Growth (% change, Q/Q)
Source: BPS
Amidst these external challenges, Indonesia appears to be holding up given domestic economic strength. Private consumption, accounting for over half of GDP, continues to expand at a sturdy rate of 1.7% q/q; (4.5% y/y during the first quarter). Key sectors driving this growth include transport, retail, and restaurants and hotels, indicating a rebound in tourism activity. Notably, the tourism sector recorded a staggering 509% increase in tourist arrivals in the first quarter of 2023 compared to the same period in 2022. Furthermore, services exports, driven primarily by the tourism sector, have seen a notable increase of 10.2% q/q. As economic activity improves in China, Indonesia's largest trade partner, there is potential for a further recovery in inbound tourism, thereby boosting services exports in the coming months.
Considering the improving economic activity in China and the stronger-than-anticipated growth in the first quarter, we have revised our full-year real GDP growth forecast for Indonesia from 4.6% y/y to a level closer to 4.9% y/y. This upward revision reflects the potential tailwinds for goods exports in the second half of 2023 and the resilience of household spending throughout the year.
Indonesia's growth and external sector performance present a mixed picture. While the first quarter showcased resilience in certain sectors, concerns over weakening global demand for exports and fluctuations in commodity prices persist. However, the rebound in tourism, a potential recovery in inbound tourism from China, and resilient household spending offer some optimism for the economy. The overall outlook remains dependent on global economic conditions and Indonesia's ability to navigate these challenges effectively.