Indonesia to grow 6.1% in 2012: HSBC

Global weakness that has strangled export-oriented economies will have a less impact on its expansion.

The forecast came after Indonesia posted a resilient Q4 GDP growth of 6.5% for a seasonally adjusted 2.2% qoq growth, higher than the previous quarter's 1.4%.

Indonesia's economy is more driven by domestic consumption, explains HSBC, and strong policy support should continue to make up for poor external demand. But it's not totally immune to the worldwide wobble. How so?

Here's more from HSBC:

These numbers confirm that Indonesia's domestically oriented economy is naturally resilient in the face of global economic weakness, with domestic sources of growth compensating for the external drag.

Moreover, domestic sources of growth remain well-supported by policy settings and structural factors. On the former, monetary policy settings are highly accommodative, even more so after BI's rate cuts in recent months, including both the formal and "pseudo" rate cuts (the latter referring to the lowering of the bottom part of the corridor). Fiscal policy settings are also more supportive of growth than they were prior to the 2008/09 global financial crisis.

On the structural front, of course, Indonesia has a lot going for it, with favorable demographics, ongoing urbanization, and a growing middle-class adding steadily to the consumption base of the economy. Ongoing efforts to lift structural growth constraints, including by investing more in basic infrastructures, are also supporting growth, although the implementation speed could be much improved. The recent approval of the land acquisition bill could, however, help expedite execution of infrastructure investment projects.

Factoring all of this in, there would seem to be less reason for the BI to be concerned about growth. Also, the already very loose monetary policy stance provides ample insurance against global spillovers, too much so in our view. That is not to say that Indonesia will not be impacted by the weak global economic conditions, it certainly will. But, the slowdown in Indonesia's case will be quite moderate by regional or any standard, for that matter; we are projecting growth of 6.1% in 2012.

In light of the recent decline in annual headline inflation, it could be argued that inflation is not a concern. However, the decline mostly reflects the high base for food prices in late 2010 and the early part of 2011. In fact, sequential inflation readings (3m-o-3m sa) are still holding up and core inflation remains firms. Moreover, the effects of the Thailand floods, the weakened exchange rate, and pent up commodity price pressures pose upside risks to inflation. Importantly, with growth expected to hold up and only decelerate to around its long term potential, underlying inflation pressures are likely to rise during the course of the year as capacity constraints tighten further.

However, the BI has a more benign outlook for inflation, presumably because it operates under different assumptions about the potential growth rate of the economy. Moreover, BI also remains on high alert against global weakness. Nevertheless, we believe that the BI will keep the powder dry this week and keep rates on hold, but that it will cut rates by 50 bps during H1 2012.

Bottom line: Growth is still strong, with the domestically oriented economy humming quite nicely to its own tune. However, the BI still appears keen to lower rates further, although we expect they will remain on hold this week.