Indonesian Economy Resilient to Global Trade War, Rising US Interest Rates: Morgan Stanley

Indonesia's second-quarter economic growth exceeded expectations, reflecting the country's macroeconomic stability and resilience against a global trade war and rising US interest rates, multinational investment bank Morgan Stanley said in a research note on Monday (06/08). (Antara Photo/Galih Pradipta)

By : Adinda Normala | on 1:54 PM August 07, 2018
Category : Business, Economy

Jakarta. Indonesia's second-quarter economic growth exceeded expectations, reflecting the country's macroeconomic stability and resilience against a global trade war and rising US interest rates, multinational investment bank Morgan Stanley said in a research note on Monday (06/08).

The Indonesian economy expanded 5.27 percent in the second quarter from the same period last year. It was the fastest pace since 2013 and higher than the Finance Ministry's 5.16 percent growth estimate.

Morgan Stanley said Southeast Asia's largest economy saw strong domestic and external demand and that it is well on its way to expand by 5.3 percent this year and 5.4 percent in 2019.

"We expect sustained export momentum to support capacity utilization, which should, in turn, increase capital expenditure and employment opportunities," Deyi Tan and Zac Su, Singapore-based economists at Morgan Stanley, wrote in the research note.

"Compared with other Asean economies, Indonesia's growth outlook is less exposed to rising trade tension, due to a lower export base and lower export market-concentration risk," they wrote.

They added that Indonesia would also see increased household spending as the government is expected to raise spending on social assistance and infrastructure ahead of next year's legislative and presidential elections.

"We believe the economy is better able to handle higher US 10-year yield compared to before. Indicators of better macro-stability, such as benign inflation, a more comfortable real rate differential, a narrower current-account deficit and better foreign reserves than during the 2013 'taper tantrums,' mitigate the risk of a disorderly rate hike leading to an abrupt slowdown in domestic demand," they wrote.

Others agree with Morgan Stanley's assessment, but urge caution.

"The growth figures remain highly encouraging and display Indonesia's resilience against global trade tensions. While the figures are likely to support the bullish sentiment, markets will be paying very close attention to see if the current growth momentum is sustainable," said Lukman Otunuga, a research analyst at online forex trading brokerage FXTM.

With a 6.3 percent depreciation of the rupiah against the dollar this year, any signs of deterioration in the country's external balance could force Bank Indonesia to tighten its monetary policy and undermine the growth momentum, he said.

Indonesia's investment growth – the second-largest driver of economic growth after household spending – slowed to 5.87 percent in the second quarter, after expanding at above 7 percent over the past three quarters.

Bank Permata Indonesia economist Josua Pardede said the government faces a difficult task to accelerate investment growth, especially if it follows through with its plan to cut imports of capital goods and scale down some infrastructure projects.

Finance Minister Sri Mulyani Indrawati said she suspects the slowdown in investment was due to the long holiday in June. She added that the government was still waiting to see whether a jump in raw material and capital goods imports in the second quarter would translate into more exports and investment for the rest of the year.

"We will continue to improve the investment climate, simplify [regulations] and provide incentives to encourage certain investments," she said.

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