Indonesia GDP slips to 6.3%

But this should be viewed positively as it translated to a 0.7% qoq seasonally adjusted increase, says OCBC.

The new GDP results led the brokerage firm to raise full-year growth forecasts to 6% from 5.8% but with the warning that domestic demand, which is driving Indonesia's growth now, poses some downside risks should exports continue to flail.

Here's more from OCBC:

The Q1 GDP data came in above our expectations, as growth is recorded at 6.3% yoy for the period, above our forecast for 6.1% yoy. While the figure is lower than the 6.5% yoy seen in Q4 2011, it still represents a 0.7% q/q seasonally adjusted expansion (based on our estimate), and definitely an encouraging data for the country’s overall economic outlook for the year. Going forward, it is imperative to consider the fact that the contribution from net exports have been almost non-existent in the past 2 quarters, which would only mean that the onus on growth would have to be on further expansion in domestic demand.

While we remain fairly constructive on Indonesia’s domestic demand momentum, several risks are worthy to mention with regards to how domestic demand will perform in the coming quarters. Firstly, the upside surprise in investment growth during Q1 stemmed from the record high seen in Foreign Direct Investment (FDI) for the period, while the total amount of domestic investment itself has declined from the previous period. We caution the negative wealth/income effect that would arise from the continued depreciative pressure on the Rupiah. As it is, the lower export earnings may also mean that we are unlikely to see investment growth gaining pace this year. Meanwhile, we also see a risk stemming from the upward trend in inflation ahead. While the impact on consumption growth from a spike in inflation may be marginal at best, coupled together with the risk of a slowing investment growth, we see a good chance of overall GDP growth losing as much as 0.4 percentage points for 2012.

Fiscal spending fell 45% qoq in Q1 2012 but this should be hardly surprising because the government typically step up their expenditure growth towards the year-end. What will complicate matters this year would be the fact that the 2012 budget is under pressure because of rising fuel subsidies. In the event that the government is committed to keep its fiscal deficit below 3% of GDP, the financial strains from rising cost of fiscal subsidies may mean some reallocation of funds initially budgeted for education and/or capital development expenditures. Given that the recent rhetoric from the government suggests that this is the plan at this juncture, on broad expectations, we think that this scenario would mean that the overall impact on growth will tend to decline for the year.

Overall, we must reiterate that while the Q1 GDP data has clearly lifted our outlook for Indonesia’s 2012 GDP growth (we now expect full-year growth to be at 6% yoy, up from 5.8% previously), the risks on the domestic front are significant enough to prompt us to continue expecting below trend growth for the year. Unless export growth picks up its slack and returns to 7-10% yoy for the year (28.9% yoy in 2011), we think it is unlikely for 2012 GDP growth to reach the 6.5% official target.