Indonesian Strategy:Leap year highlights GDP limitations

Event.

BI has recently been quoted as saying it expects Indonesia’s 1Q16 GDPgrowth to come in at 5.1–5.2% – a further improvement on the 5.07% bookedin 4Q15A. Superficially, this indicates a trend of continuing sequentialimprovement. However, lest it be forgotten, 2016 is a leap year, and hence1Q16 will have 91 days vs. 90 days in 1Q15A. Consequently, a like-for-likeadjustment ought to subtract about 1.1% (i.e. 1/91) off headline GDP growth.

In theory, this would imply that – should 5.1–5.2% growth be delivered –underlying growth actually slowed sharply to about 4.0–4.1% in 1Q16.

If we had any faith in the accuracy of GDP estimates, this would be a veryconcerning trend. However, as we have discussed in past research, we havelittle to no confidence in the reliability of GDP growth estimates given theformidable challenges to data collection/aggregation in Indonesia, and do notbelieve them to be accurate to even the nearest 100bp, let alone 10bp.

1Q16’s unintuitive growth number highlights this perspective is likely correct.

Impact.

We believe the relevance of the above is not to highlight that Indonesia’seconomy sharply weakened QoQ in 1Q16 (it is not at all clear it has), butrather to highlight how unreliable headline GDP numbers are in gaugingeconomic trends. This is not a criticism of Indonesia’s GDP aggregators – thechallenges they face in trying to estimate growth in a country where datacollection is poor; three-quarters of the population lacks a bank account; andwhere traditional market (and black market) activities are rife, are legion.

However, it is important for investors to bear these challenges in mind whenassessing what relevance to ascribe to headline GDP numbers. This is a veryrelevant issue, because Indonesia’s continuing relatively high rates of GDPgrowth, coupled especially with the apparent resilience of that growth vs. EMpeers, has been a key cause of the JCI’s continuing valuation premium.

The problem is that headline GDP numbers bear only a casual resemblanceto actual trends on the ground. For instance, official statistics imply thatIndonesia’s 1H15 GDP growth slowed only 30bp from 5.0% to 4.7%, but thecombination of weaker government spending; lower exports; a sub-50 PMI; asharp drop in various high-frequency data series (e.g. a c.20% drop in carsales); and a veritable ‘profit recession’ across JCI companies, indicates to usthat the slowdown was in fact much more violent. Indeed, if one comparesIndonesia to other EMs using virtually any data series other than headlineGDP – e.g. trends in car sales; the PMI; exports; domestic corporate growthand profitability; credit growth and NPLs; imports; and the government’s fiscalaccounts/tax collection, etc, it is clear that Indonesia’s slowdown has beenjust as sharp as the slowdowns experienced by many other commodity EMs –many of which have been heavily punished from a valuation standpoint.

Outlook.

We believe Indonesia has been given too much credit for its growth resiliencedue to an excessive degree of confidence being placed in the reliability ofGDP growth estimates. Trends in domestic corporate profitability paint a verydifferent picture. Indeed, despite sharply reduced expectations, and thegovernment’s fiscal stimulus measures, 4Q JCI profit misses have exceededbeats to date, and the JCI’s YTD rally has been entirely multiple-driven.