Indonesia Business Forecast Report Q1 2015

Indonesia Business Forecast Report Q1 2015

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.

E conomic 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 5
Core Views..5
Major Forecast Changes.5
Key Risks To Outlook..5
Chapter 1: Political Outlook 7
SWOT Analysis. 7
BMI Political Risk Index.. 7
Domestic Politics .. 8
Jokowi Faces Obstructionist Opposition.8
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 ..8
Long-Term Political Outlook 9
Outlook Improved, Uncertainty Lingers9
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.
Chapter 2: Economic Outlook. 13
SWOT Analysis.. 13
BMI Economic Risk Index 13
Economic Activity .. 14
Risks To 2015 GDP Forecast.14
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 Activity14
Fiscal Policy. 15
Fiscal Position Sound, But Spending Mix Still A Concern..15
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.16
Monetary Policy. 17
AEC: Financial Services Liberalisation Will Be Drawn Out.17
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 20
Shifting To Neutral On IDR As US Dollar Takes Off.20
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. 20
Table: CURENCY FORECAST..20
Table: Current Account.21
Chapter 3: 10-Year Forecast. 23
The Indonesian Economy To 2023. 23
A Bullish Long-Term Growth Story..23
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 Forecasts23
Chapter 4: Operational Risk. 25
Operational Risk Index. 25
Operational Risk 26
Table: Op erati onal Risk ..26
Transport Network 27
Table: Transp ort Netw ork Risks ..28
Economic Openness.. 32
Table: Asia - Economic Openness..32
Table: Total Imp orts And Top 5 Products Imp ort ed (USDmn un less oth erwis e st ated). 33
Table: Product Exports And Top 5 Export Partn ers (USD un less oth erwis e st ated). 34
Chapter 5: Key Sectors.. 37
Oil & Gas 37
Table: Headlin e Forecasts ..37
Table: Oil Production38
Table: Oil Production38
Table: Gas Production.39
Table: Gas Production.40
Infrastructure.. 41
Table: Energy And Utilities Infrastructure Data..44
Other Key Sectors 45
Table: Pharm a Sect or Key Indic ators .45
Table: Telecoms Sect or Key Indic ators 45
Table: Defenc e and Securit y Sect or Key Indic ators 45
Table: Food and Drink Sect or Key Indic ators .46
Table: Aut os Sect or Key Indic ators .46
Table: Freight Key Indic ators ..46
Chapter 6: BMI Global Assumptions.. 47
Global Outlook 47
Big Emerging Market Revisions.47
Table: Global Assumptions.47
Table: Developed States, Real GDP Growt H, %..48
Table: BMI VE RSUS BLO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 48
Table: Em erging Mark ets , Real GDP Growth , %.49

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