2013 Country Outlook: Indonesia

Transcription

1 2013 Outlook Indonesia Myanmar Philippines Thailand 2013 Country Outlook: Indonesia Research Team Brian Sheley Managing Director Andhika Suryadharma Senior Market Strategist Febrio Kacaribu, PhD Senior Economist Current account deficit to shrink; GDP growth to see slight uptick Bank Indonesia looks to be less tolerant of a weak rupiah in 2013 Monetary policy to tighten on inflationary pressures Fuel subsidy reductions possible President SBY vying for post-presidential influence Presidential field looks weak but dark horse candidate possible Presidential candidate nominating threshold ruling out this year Low expectations for policy making in 2013 Expecting JCI to reach 4,550 with a mixed outlook Cascade Asia Forecast: Q1 Q2 Q3 Q Real GDP (%, y/y) CPI (%, y/y) Trade Balance (% of GDP) Policy Rate (%, eop) Economic Outlook Current account deficit to shrink; GDP growth to see a slight uptick Indonesia s domestic consumption and consistently strong investment climate have offset its export slump and kept it sheltered from slower global growth. Consumption will have a tailwind this year with increased spending by political parties and higher minimum wages and will continue to serve as a buffer against slow global growth. FDI grew by 23% y/y in 2012 and with an improving global economy we think Indonesia will be able to sustain strong foreign investment inflows in Cascade Asia Advisors PO Box Seattle, WA info@cascadeasia.com While its current account is at an estimated 2.4% deficit, we expect strong export demand from Japan, which unveiled a new US$116bn stimulus package, to be a boon for Indonesia s stubborn current account deficit. We also see improved export demand from the US which is showing some signs of recovery. Those exports gains may be at least partially off-set Copyright 2013 Cascade Asia Advisors. All Rights Reserved. Page 1

2 though depending on what happens in China this year. Indonesia also imposed a number of import restrictions in 2012 but we expect resilient consumer demand to sustain and even surpass existing import levels, largely eclipsing any negative policy impact. We think commodity prices have mostly bottomed out and are likely to begin recovering with a marginally improved global environment in Overall, we forecast 6.4% GDP growth based on solid macroeconomic fundamentals, sustained foreign investment and robust domestic consumption. If the government were able to fast-track portions of infrastructure spending under its infrastructure master plan (MP3EI) this year, growth could reach as high as 6.8%, but this is not our base case. Bank Indonesia looks to be less tolerant of a weak rupiah in 2013 The rupiah depreciated roughly 7% in 2012 and was one of the worst performing currencies in Asia last year but Bank Indonesia s accumulation of more foreign reserves is a sign that it may be less tolerant of a weak rupiah in Foreign exchange reserves stood at USD 112bn in December 2012, gaining each month for the past seven months, a trend we expect to extend into We further expect Bank Indonesia to contain appreciation of the rupiah as it targets a current account deficit of 2% of GDP. Therefore, the most likely path for the rupiah in 2013 is a slight appreciation against the USD to the tune of 9500 by the end of Fuel subsidy reductions possible There is chatter of a 33% fuel price hike in April 2013 but the likelihood of a subsidy reduction that high prior to the election is slim, to say nothing of a full-fledged fuel subsidy reform. The most likely pathway to fuel subsidy reform in Indonesia will be incremental versus one sweeping policy reform which would risk bringing the contentious issue to a head, an unpalatable scenario for the ruling party, particularly with an election right around the corner. Any level of subsidy reduction though would increase inflation in an already high inflationary environment. Monetary Policy Outlook Monetary policy to tighten on inflationary pressures There will be added inflationary pressures from stronger domestic demand in 2013 on the back of higher disposable incomes for those working in the formal sector due to the minimum wage hike as well as substantial spending by political parties. Combined with the 15% increase in electricity prices, we expect inflation to increase in 2013 to the tune of 5.4%, still within Bank Indonesia s inflation target band, but much higher than in Copyright 2013 Cascade Asia Advisors. All Rights Reserved. Page 2

3 We expect Bank Indonesia to tighten monetary policy in 2013 but to hold any policy rate increases until Q3 or Q4 to ease pressure on the rupiah. We anticipate a 25bps increase to 6% in H2 to ease inflationary pressures. Bank Indonesia will continue to contain consumer demand through the loan-to-value regulations which we think have had mixed results, effective on the low end of socio-economic scale but having minimal impact on the spending habits of middle to higher income classes. Bank Indonesia will need to deploy other tools from its monetary policy tool kit by adjusting the overnight deposit (Fasbi) rate in H to relieve inflationary pressure in the short term and increasing upward pressure on the rupiah. Political Outlook President SBY vying for post-presidential influence to the detriment of sound leadership President Susilo Bambang Yudhoyono (SBY) is facing the end of his second term and unable to run again. However, following a parade of senior Partai Demokrat members who are either convicted or undergoing trial for corruption, there is no one within the president s inner circle with the household name and requisite party support to conceivably make a bid for the presidency in Instead, the president is searching for other options for continued influence. This will not bode well for political appointments and policy making during his remaining time in office. If the president were to reshuffle his cabinet to replace any of his ministers this year we would see to what extent he is opening his inner circle and gain insight into his priorities during his final year. We are not optimistic and do not expect many promarket and pro-reform overtures by the president or his cabinet in 2013 and would be unsurprised by further protectionist policies and market distortions. Presidential field looks weak but dark horse candidate still possible Indonesia s political temperature in 2013 will approach fever pitch with the run-up to presidential election set for July 2014 and a run-off in September. Parliamentary elections are scheduled for April has long been in the cross-hairs for Aburizal Bakrie, the Golkar Party chair and the party s official candidate for president and Gerindra Party Chair, businessman, and once general Prabowo Subianto, has clear aspirations for the top office. Former one-term president and PDI-P chair is also positioning her party for a bid at the presidency. However, they, like other possible contenders, are prominent players in Indonesia s patronage system and are not likely to have a credible reform agenda at a time of high disenchantment among the electorate. There is at least a conceivable chance that a reform candidate may yet emerge. If anyone, the dark horse candidate would be Joko Widodo, the Governor of Jakarta who has tremendous Copyright 2013 Cascade Asia Advisors. All Rights Reserved. Page 3

4 political momentum and is garnering a healthy following in Jakarta to compliment a dedicated cadre in Solo (where he served as Mayor). He has only just embarked upon establishing himself as a household name but the fact that his would-be presidential contenders have sought to court him and others to discredit him indicates that he is indeed a formidable option. Presidential candidate nominating threshold ruling out this year and will shape election Parliament has yet to finalize the Presidential Election Bill which has been bogged down for months with wrangling over the presidential nominating threshold. Currently the threshold is set at 20% of seats in Parliament or 25% of the national vote garnered in the legislative elections before a party can officially nominate their candidates, but this is still being debated. It will be unlikely that the composition of any presidential ticket will be known until May 2014 when the official results from the legislative election are released and parties know their relative strengths and their eligibility to field a candidate. Although a lower nominating threshold was put forward by smaller parties we think Indonesia s patronage system will win the day and ultimately favor the higher threshold, thus successfully instilling artificially rigorous eligibility requirements to avoid new competition. Low expectations for policy making in 2013 Indonesia s parliament remains largely corrupt, widely discredited and almost wholly ineffective. That will not change in 2013 as we expect a continuation of the poor quality of legislation that we saw in Parliament s legislative agenda for 2013 contains 70 bills, spanning geothermal energy and revisions to the oil and gas law to banking and review of the corrupt crimes laws. Combined with the 31 unfinished bills from this year and presidential and parliamentary elections looming in 2014, we expect the 2013 legislative cycle to be an unproductive one with not all of those bills seeing floor time. We see the net impact of the 2013 legislative cycle set to be a slight dialing back of democratic reforms and causing investor confusion. We think a revision of the corrupt crimes law puts the independence of the Anti- Corruption Commission (KPK) at risk while we expect a review of the oil and gas law to cause more confusion than provide needed clarity. Market Outlook Expecting JCI to reach 4,550 with a mixed outlook We maintain a relatively positive outlook for the JCI in 2013 amid sound macroeconomic fundamentals, consistently strong domestic consumption, high foreign direct investment and an improving infrastructure development environment. Combined with a continuation of the Fed s QE3 into 2013 and beyond and the ECB s European Stability Mechanism now in force, we do anticipate an improved, if only marginally, global backdrop and with it, Indonesia s ability Copyright 2013 Cascade Asia Advisors. All Rights Reserved. Page 4

5 to hedge weakness in its current account balance. Foreign holdings remain high and cautious of policy uncertainty in the lead up to the elections. We also note the potential for a delayed fuel price hike and thus a higher budget deficit. Market valuations do allow some room for potential upside. We expect a modest rise in the JCI to 4,550 points, offering a potential upside of 6% and implying 2013 PE of 14x. Cascade Asia Advisors is a risk assessment and strategic advisory firm focused on Southeast Asia. We combine quantitative and qualitative analysis with rich perspective to render convoluted information into actionable intelligence and uncertain environments into navigable terrain. Our specialized focus is monitoring and assessing what drives political, macroeconomic and financial market developments in frontier and emerging markets in Southeast Asia and how they impact organizations. Our clients find more prosperous market opportunities, modify their business planning with sharper focus and face challenges with greater clarity and confidence. We help organizations understand, adapt and prosper in the Pacific Century. DISCLAIMER This document is for distribution only as may be permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Cascade Asia Advisors to any registration or licensing requirement within such jurisdiction. It is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document ( the Information ), except with respect to Information concerning Cascade Asia Advisors. The Information is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by other business areas of Cascade Asia Advisors. Nothing in this document constitutes a representation that any investment strategy or recommendation is suitable or appropriate to an investor s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgment in making investment decisions. Copyright 2013 Cascade Asia Advisors. All Rights Reserved. Page 5