Indonesia Business Forecast Report Q1 2015

Date: October 18, 2014
Pages: 49
US$ 1,195.00
Report type: Strategic Report
Delivery: E-mail Delivery (PDF), Download
ID: I13263BF15CEN

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Indonesia Business Forecast Report Q1 2015
Includes 3 FREE quarterly updates

Core Views

Despite the fact that Joko 'Jokowi' Widodo emerged victorious in July's presidential elections, significant political uncertainty remains. In particular, Prabowo Subianto's Red and White coalition has shown signs that it will be a particularly obstructionist opposition in parliament, creating additional risk to the implementation of Jokowi's policy agenda. While we remain generally positive on the incoming administration, this is a key risk to our view.

While his policy platform has not yet been fully elaborated, Jokowi's ability to streamline bureaucratic inefficiencies, improve public finances, strike a balance between pro-business and pro-welfare policies, as well as willingness to take politically unpopular but necessary measures to right economic imbalances could provide some upside potential for the infrastructure, mining and oil and gas sectors.

Economic growth will likely accelerate in 2015 as policy-making stabilises along with improving investor sentiment. Indonesia's macroeconomic outlook has stabilised considerably since 2013, including an improvement in the trade account as well as significantly lower inflation. This should allow Bank Indonesia (BI) room to ease policy in H115.

Major Forecast Changes

We have downgraded our end-2014 forecast on the Indonesian rupiah to IDR12,200/USD from IDR11,500/USD previously owing to broad US dollar strength. That said, we remain positive on the currency's fundamental outlook, and expect it to recover somewhat in 2015 to average IDR11,850 next year.
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook


SWOT Analysis
BMI Political Risk Index
Domestic Politics
Jokowi Faces Obstructionist Opposition
Despite Prabowo Subianto's defeat in July's presidential election, the former general continues to wield a significant amount of political
leverage. Following his Red and White coalition's success in scrapping direct elections for local political leaders, we note that risks of a
highly obstructionist opposition against Joko Widodo's policy agenda are on the rise.
  Table: Politic al Overview
Long-Term Political Outlook
Outlook Improved, Uncertainty Lingers
Although Indonesia has returned to relative orderliness since the post-Suharto chaos of the late 1990s and early 2000s, the country
faces multiple challenges and threats to its stability that could flare up again if the opposition to incoming president Joko 'Jokowi' Widodo
successor proves excessively obstructionist. As such, investors will continue to view Indonesia as one of Asia's riskier destinations.


SWOT Analysis
BMI Economic Risk Index
Economic Activity
Risks To 2015 GDP Forecast
Indonesia's trade account continues to improve, and along with the increase in policy continuity that should follow Joko Widodo's
accession to the presidency, we believe that Indonesia's economic growth outlook will be brighter in 2015. That said, an obstructionist
opposition in parliament, as well as a decreasing likelihood of interest rate cuts in H115, underscore increasing downside risks to our
sanguine real GDP growth forecast of 6.0% next year.
  Table: Economic Activity
Fiscal Policy
Fiscal Position Sound, But Spending Mix Still A Concern
Indonesia's fiscal deficit remains in manageable territory by historical standards, and the country's government debt-to-GDP ratio is
an admirable 24.9%. However, improving the government spending mix remains a significant challenge, with total subsidy spending
hovering near 20.0% of overall expenditures. While incoming president Joko Widodo is focused on reducing fuel subsidies in an effort to
tackle this problem, strong parliamentary opposition could be a barrier to progress in this area.
  Table: Fiscal Policy
Monetary Policy
AEC: Financial Services Liberalisation Will Be Drawn Out
The AE C will prove fortuitous for the larger banks in the region, allowing them to provide cross-border financial services at a lower cost.
We also see greater ASEA N integration helping Malaysia cement its position as a leading Islamic finance player. Furthermore, the
deregulation of regional insurance markets will attract multinational insurers from slower growing markets, such as Japan and Korea,
into ASEA N. That said, political risks, particularly in Indonesia, remain a salient threat towards the liberalisation of the region's financial
services environment.
Exchange Rate Policy
Shifting To Neutral On IDR As US Dollar Takes Off
We have shifted our near-term outlook for the Indonesian rupiah to neutral in light of ongoing US dollar strength, and now see the
currency ending 2014 near its current level of IDR12,200/USD. However, we maintain our expectations for moderate strength over the
medium term owing to a solid fundamental outlook, and expect the currency to appreciate to IDR11,800/USD in 2015.
  Table: Current Account


The Indonesian Economy To 2023
A Bullish Long-Term Growth Story
Indonesia's large domestic demand base and exposure to commodities are two key factors driving our bullish growth outlook for the
next decade. That said, government policy reform will be crucial in determining if the country can reach its real growth potential.
  Table: Long-Term Macroeconomic Forecasts


Operational Risk Index
Operational Risk
  Table: Op erati onal Risk
Transport Network
  Table: Transp ort Netw ork Risks
Economic Openness
  Table: Asia - Economic Openness
  Table: Total Imp orts And Top 5 Products Imp ort ed (USDmn un less oth erwis e st ated)
  Table: Product Exports And Top 5 Export Partn ers (USD un less oth erwis e st ated)


Oil & Gas
  Table: Headlin e Forecasts
  Table: Oil Production
  Table: Oil Production
  Table: Gas Production
  Table: Gas Production
  Table: Energy And Utilities Infrastructure Data
Other Key Sectors
  Table: Pharm a Sect or Key Indic ators
  Table: Telecoms Sect or Key Indic ators
  Table: Defenc e and Securit y Sect or Key Indic ators
  Table: Food and Drink Sect or Key Indic ators
  Table: Aut os Sect or Key Indic ators
  Table: Freight Key Indic ators


Global Outlook
Big Emerging Market Revisions
  Table: Global Assumptions
  Table: Developed States, Real GDP Growt H, %
  Table: Em erging Mark ets , Real GDP Growth , %
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