Why analysts' hopes are up for a domestic demand recover in Indonesia

Manufacturing PMI hit record-high.

According to DBS, their above-consensus 5.8% GDP growth forecast for 2014 hinges upon expectations for stronger recovery in domestic demand in 2H14.

Here's more from DBS:

Several data have been quite encouraging in the year-to-date. The fall in imports of capital goods has been arrested suggesting that local businesses might have fully adjusted to the current rupiah exchange rate. Higher core inflation reading also suggests that underlying domestic demand remains strong.

Manufacturing PMI is at its record-high in May14. While this is relatively a “soft” data, it provides a hint of how industrial production is trending. At the current pace, industrial production is growing at about 3-4% YoY, lower than the average 6% growth seen in 2013.

Should manufacturing PMI be sustained at current levels though, we may see industrial production slightly topping last year’s growth.

This will necessitate a stronger 2H14, and thus, it is important to monitor manufacturing PMI numbers going forward.

All eyes will also be on the July presidential elections. Both candidates have been busy defending their economic roadmaps but local businesses seem to be more interested in the implementation process of these policies.

Any significant breakthrough in the first 3 months of the new government (starting in Oct14) is presumed to be limited for now. At the very least though, business want to avoid any political disturbances in the aftermath of the presidential elections.

Going by the peaceful conclusion to the legislative elections in Apr, political risks seem to be fairly limited at this juncture.

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