Here's what threatens Indonesia's strong 6.1% GDP

Inflation starting to exceed 5.5% limit.

According to DBS, GDP growth is expected to reach 6.1% YoY in 1Q13, unchanged from the preceding quarter. 

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This would mark the 10th consecutive quarter where YoY growth has stayed above 6%. Investment-led growth and domestic consumption strength have been two key reasons why Indonesia continues to perform so well despite challenges in the global economy over the past few years.

In recent months, softer data from the US and China point to weakness in external demand, but Indonesia is likely to be less directly affected. 

However, certain factors have become less favorable. Firstly, inflation is starting to push above the central bank’s(BI’s) upper limit of 5.5%. With fuel price hikes potentially looming, there are risks that consumers may start to cut back on spending.

There would also be a temporary kneejerk reaction to consumption ifthe fuel price adjustment is sizable. Secondly, commodity prices have been lackluster.

With global growth still in a soft patch, any recovery in commodity prices is likely to be modest and this has negative repercussions on the economy. Holding everything else constant, a prolonged period of depressed commodity prices would lead to lower commodity-related investments.

The challenge lies with diversifying investmentinto secondary industries. Moreover, the second-round effects from lower commodity prices are already being felt.

After surging for multiple years, motorcycle sales have tapered off and this is likely due to the slowdown in the commodity sector. Barring a rebound in commodity prices,strainsin the external accountislikely to persist despite the improvementin the trade balance.

External stability and inflation risks work to constrain Indonesia’s GDP growth from its potential of around 6.5-7.0%. For 2013, we maintain our GDP growth forecast at 6.3%.