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ECONOMIC UPDATE - GDP - Escaping the worst



Rising from the lowest point

As anticipated before, Indonesia entered the first recession since the 1998 Asian Financial Crisis as the economic contraction was recorded in 2Q20 and 3Q20. After it plunged sharply by 5.32% YoY (vs. +2.97% YoY in 1Q20) in 2Q20, the contraction narrowed to 3.49% YoY in 3Q20. The contraction is deeper than consensus estimate of -3.20% YoY and ours of -2.08% YoY. The relaxation of large-scale social restriction (PSBB) in Jun-20 drove the improvement of the economic performance in 3Q20 driven by industries that start to reoperate alongside with higher household consumption. All in all, Indonesia has escaped the lowest point in 2Q20 and we are in the track of recovery path that may seem be slower than expected as the uncertain Covid-19 trajectory remains in Indonesia while the final vaccine has not been distributed until now. The impact to market in short run will be limited, as the recession has been priced in before.


Improvement from all components

Statistics Indonesia office (BPS) recorded 3Q20 GDP is equivalent to Rp3,895 tn (USD268.3 bn) of nominal GDP and Rp2,721 tn (USD187.4bn) of real GDP. Household consumption was still the biggest contributor of GDP as the share was 57.3% of GDP (-4.04% YoY) and it brought -2.17% to total GDP contraction. The second biggest contributor is GFCF (investment) where it contributed 31.1% of GDP (-6.48% YoY). The third biggest contributor is government expenditure where it contributed 9.69% of GDP (+9.76% YoY). Non-profit institutions serving households (LNPRT) contributed by 1.29% of GDP (-2.12% YoY). The last, export and import grew at -7.52% YoY and -13.9% YoY, respectively.


K-shaped recovery

The pandemic diverges the path of recovery from all the sectors. The condition is commonly known as K-shaped recovery, it occurs when the sectors recover at different rates, times, or magnitudes. Some of them may experience deeper and persist contraction while others successfully grow with the calamity. The contrast is depicted as two rightward directions in K letter, one of them rises and the other slips. Health and Social Services (+15.3% YoY) and Information and Communication (+10.6% YoY) have the highest growth, especially the former where the growth increased by 12.2% QoQ or the highest in quarterly basis. We see the growth will sustain in 2021 as both sectors are needed the most under the pandemic. On the other hand, Transportation and Warehouse (-16.7% YoY) and Accomodation and Food and Beverages (-11.9% YoY) were the biggest laggards in 3Q20. 


Resilient investment realization

Surprisingly, investment realization until 3Q20 reached 74.8% of the 2020 investment target of Rp871.2 tn. Until 3Q20, it still showed a positive trend where it increased by 1.7% YoY to Rp611.6 tn (USD42.2 bn). For domestic direct investment (DDI), it increased by 9.3% YoY to Rp310 tn while foreign direct investment (FDI) contracted by 5.1% YoY to Rp301.7 tn. Impressively, there were 102,676 investment projects with 861,581 of workers absorption. The stunning results may not sustain in 4Q20 as the pandemic impact seems to take a lag. However, the better investment climate supported by the Omnibus Law may help the government to achieve the investment realization target. Although we see the realization will be below the target in 2020, the positive trend in investment realization signalizes the resilient investment-led growth that Indonesia has amid the pandemic.


Expecting better result in 4Q20

We see the National Economic Recovery (PEN) program helps the economy especially the demand-side through the social protection budget. However, the relatively low realization of the budget at 51.9% from the allocated ceiling of Rp695.2 tn in the first week of Nov-20 seem will not achieve the fully absorption until the YE 2020. Due to the 3Q20 GDP result, we will review our growth estimation for 4Q20 at -0.11% currently. Thus, we will revise down the growth estimation to a range of -1.2% to -2.0% YoY for YE 2020 but still maintaining higher growth forecast of 4.4% YoY in 2021.