Indonesia Business Forecast Report Q1
2013

Indonesia Business Forecast Report Q1 2013

Core Views:

Economic growth slowed again in the third quarter, and we expect the moderation to continue on into 2013. In particular, we see a relatively challenging outlook for investment in 2013 owing to weakness in commodity prices, policy concerns, and the fragile state of the global economy. We expect headline GDP growth to slow to 5.6% in 2013 from 6.2% in 2012.

Indonesia's business environment may be challenged by the government's pursuit of protectionist policies, especially within the mining sphere. While there have been some signs that the government may move to ease certain laws that business interests have decried as particularly punitive, it will be increasingly difficult for the government to backtrack in view of approaching elections in 2014.

Major Forecast Changes

We have downgraded our 2013 average forecast for the rupiah to IDR9,700/US$ versus IDR9,400/US$ previously in line with ongoing stresses seen in Indonesia's external position.

We have upgraded Indonesia's 2012 fiscal deficit forecast from 2.9% of GDP to 2.5%. However, we note that the government continues to struggle with efficiency issues as a result of its burdensome energy subsidy programme.

Key Risks To Outlook

Indonesia continues to bear risks to substantial hot money outflows in the event of a rapid deterioration in the global economic environment given the large participation level of foreign investors in the market. Such a scenario could effect a considerable sell-off in the rupiah and rapidly rising yields in Indonesian sovereign debt, as seen in 2008.

• Executive Summary
  • Core Views
  • Major Forecast Changes
  • Key Risks To Outlook
• Chapter 1: Political Outlook
  • SWOT Analysis
  • BMI Political Risk Ratings
  • Political Analysis
  • Mining Law Questioned, But Protectionism To Persist
  • While the mining sector in Indonesia may see a reprieve following a Supreme Court ruling that the country's unpopular restrictions on
  • unprocessed metal ores may not be enforceable, we continue to believe that the government will pursue a relatively protectionist policy
  • track in the run-up to 2014 elections, thus potentially undermining Indonesia's already shaky business environment
    • TABLE: INDONESIA POLITICAL OVERVIEW
  • Long-Term Political Outlook
  • Outlook Improved, But Uncertainty Lingers
  • Although Indonesia has returned to relative orderliness since the chaos of the late 1990s and early 2000s, the country faces multiple
  • challenges and threats to its stability that could flare up again if President Yudhoyono or his successor proves incompetent or if
  • improved governance fails to take hold. As such, investors will continue to view Indonesia as one of Asia's riskier destinations
• Chapter 2: Economic Outlook
  • SWOT Analysis
  • BMI Economic Risk Ratings
  • Balance Of Payment
  • Rupiah Stabilising, But Hot Money Risks Lurking
  • We continue to hold a neutral bias on the rupiah over the short-term, as our expectations for the currency to hit stability have played
  • out well. Although Indonesia's external position has deteriorated markedly over the course of 2012, it too appears to have found some
  • stability, and we believe that pressures from the country's weakening trade position have eased somewhat. As such, we expect the unit
  • to end 2012 at our target of IDR9,600/US$
  • INDONESIA-CURRENT ACCOUNT
  • Economic Activity
  • Mining Investment Facing Challenges In 2013
  • While we have upgraded our 2012 GDP growth forecast for Indonesia to 6.2% from 6.0%, we continue to see signs that the economy
  • is in the midst of a moderate slowdown. Owing to a challenging outlook for investment as well as continued external weaknesses, we
  • expect GDP growth to slow to 5.6% in 2013
    • TABLE: ECONOMIC ACTIVITY
  • Monetary Policy
  • Tightening Bias Remains As FASBI Targeted
  • In line with our expectations, Indonesian headline inflation climbed to 4.6% in October from its surprisingly low 4.3% print in September
  • In view of Indonesia's peaking credit cycle as well as the central bank's weakening bias towards the rupiah, we now expect Bank
  • Indonesia to keep its benchmark interest rate on hold at a record low of 5.75% even as it tightens monetary policy in other areas
    • TABLE: MONETARY POLICY
  • Fiscal Policy
  • Deficit Forecast Slightly Lower, But Problems Persist
  • Although Indonesia's fiscal deficit came in at just 0.7% of GDP from January to November, we continue to believe that the country
  • needs to reform its burdensome energy subsidy structure before any substantial improvement in its fiscal position is seen. However,
  • it will be increasingly difficult to amass the political will necessary for substantial subsidy reforms amid the looming shadow of 2014's
  • general elections, and at this point we have not yet seen signs that such a feat is possible. Nevertheless, in light of under-spending in
  • other areas, we have upgraded our 2012 fiscal deficit forecast to 2.5% of GDP from 2.9% previously, while we retain our 2.7% forecast
  • for 2013
    • TABLE: FISCAL POLICY
• Chapter 3: 10-Year Forecast
  • The Indonesian Economy To 2021
  • 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: TERM MACROECONOMIC FORECASTS
• Chapter 4: Business Environment
  • SWOT Analysis
  • BMI Business Environment Risk Ratings
  • Business Environment Outlook
  • Institutions
    • TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
    • TABLE: BMI LEGAL FRAMEWORK RATING
  • Infrastructure
    • TABLE: LABOUR FORCE QUALITY
    • TABLE: ASIA, ANNUAL FDI INFLOWS
  • Market Orientation
    • TABLE: TRADE AND INVESTMENT RATINGS
    • TABLE: TOP EXPORT DESTINATIONS, 2001-2008
  • Operational Risk
• Chapter 5: Key Sectors
  • Oil & Gas
  • Infrastructure
    • TABLE: INDONESIA OIL & GAS-HISTORICAL DATA AND FORECASTS, 2009-2016
    • TABLE: INDONESIA ENERGY AND UTILITIES INFRASTRUCTURE INDUSTRY DATA, 2010-2016
    • TABLE: INDONESIA CONSTRUCTION AND INFRASTRUCTURE INDUSTRY DATA, 2010-2016
  • Other Key Sectors
    • TABLE: AUTOS SECTOR KEY INDICATORS
    • TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
  • INDONESIA DEFENCE AND SECURITY SECTOR KEY INDICATORS
    • TABLE: PHARMA SECTOR KEY INDICATORS
    • TABLE: TELECOMS SECTOR KEY INDICATORS
    • TABLE: FREIGHT KEY INDICATORS
• Chapter 6: BMI Global Assumptions
  • Global Outlook
  • Downward Revisions, But Core Views Remain Unchanged
    • TABLE: GLOBAL ASSUMPTIONS
    • TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
    • TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
    • TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST.