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Bahana | Bahana Securities Analysis: Indonesia Macro: Oil Boon

On the back of lower oil prices, President Jokowi has announced a 13% cut in gasoline price from 7,600 IDR per liter to 6,600 IDR, nearly back to square one compared to the price during the SBY regime at 6,500 IDR per liter. This move by President Jokowi followed a recent 10.5% cut from 8,500 IDR per liter to 7,600 IDR on 1st January 2015 (exhibit 1). Also announced was a cut in diesel price to 6,400 IDR per liter from 7,250 IDR, down 11.7%. Furthermore, President Jokowi decreased SOE ex-factory cement prices by 3,000 IDR/50kg bag to around 53,000 IDR, approximately translating to a 5.4% price decline.

Exhibit 1: Historical fuel price trend

Exhibit 1. Historical fuel price trend

Source: Statistics Indonesia, Bahana estimates

At this stage of the cycle, we further lower our 2015 average Brent oil price estimate to $60 USD/bbl from $70.4 USD/bbl due to the continuing drop in the oil price (exhibit 2). However, as we continue to believe the recent plunge in oil prices will not be sustained over the longer term on production cuts from producers, we expect the end-2015 Brent oil price to bounce back to $65 USD/bbl (previous estimate: $78 USD), before gradually rising to $75 USD/bbl (previous: $88 USD) by end-2016.

Exhibit 2: Macroeconomic forecasts

Exhibit 2. Macroeconomic forecasts

Source: BI, BPS, Bahana estimates *Forecasts **Average Brent oil price ***Year-end Brent oil price

The above-mentioned factors, coupled with the current fixed fuel subsidy scheme (only the diesel subsidy of 1,000 IDR/liter), have us lowering our 2015 CPI target to 5% y-y (previous: 5.57%). As a result of lower inflationary pressure, central banks are fine-tuning their monetary policies to be more expansive. For instance, India’s monetary authority unexpectedly has cut its reverse repo and repo rates both by 25bp. This move should ease pressure on Bank Indonesia to lift its benchmark rate due to the expected Fed rate hike. Thus, we lower our BI rate outlook to a flat rate of 7.75% from 8% previously (exhibit 3).

Exhibit 3: Inflation & policy rates

Exhibit 3: Inflation & policy rates

Source: BPS, Bank Indonesia, Bahana estimates

Our current view is to conservatively assume that the Fed is on track to start normalizing its benchmark rate policy in 3Q15 on solid US macroeconomic indicators amid the bleak global economic outlook. Therefore, we expect the IDR to further weaken and hover at the 13,000/USD level in 2Q15. Accordingly, we revise our average 2015 IDR estimate to 12,627/USD (previous: 12,242/USD) and our end-2015 estimate to 12,000/USD (previous: 11,500/USD) (exhibit 2).

In the 2015 revised state budget proposal, the Jokowi administration has proposed lowering the energy subsidy to 183tn IDR (down 47% from 344.7tn IDR). Thus, the government would have 155tn IDR in fiscal room, with 60% (93tn IDR) to be distributed to infrastructure-related projects, increasing total capital spending to 290tn IDR (up 85.3%). We expect budget hearings to run smoothly on lower political tension as the opposition camp has become weaker with 2 conflicting forces within the Golkar party apparently in a deadlock.

Combined with the commitment of Indonesia’s Investment Coordinating Board (BKPM) to implement an integrated one-stop approval service, infrastructure support from the government should help to boost 2015 direct investment, which we expect to reach $47.8bn USD up 7.8% y-y.

Nonetheless, a drop in the oil price to a consistent level of below $60 USD/bbl would raise concerns on the state revenue side. We believe the Jokowi government’s 2015 tax revenue target of 1,490tn IDR, up 30% from the 2014 unaudited realization of 1,143tn IDR, is too optimistic. If the government fails to secure the tax target and spending cuts are not an option, we believe the 2015 fiscal deficit target (of no higher than 3% of GDP) would be in jeopardy. This would be due to the lower oil prices having pushed the government to cut its 2015 oil revenue target from 313tn IDR to 170tn IDR (down 45.7%).

In sum, we revise up our 2015 GDP growth estimate to 5.37% from 5.04%, propelled by stronger domestic consumption backed by lower fuel prices and solid investment realizations, as well as a higher government contribution to the domestic economy through productive spending.