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Indonesia Country Risk Reports Q2 2015

Indonesia Country Risk Reports Q2 2015

Core Views

Despite fears that Prabowo Subianto's red and white coalition would look to block Jokowi's policy-making efforts, the President was able to push through sweeping fuel subsidy reductions in both November and December 2014 on his own accord. This will greatly reduce the government's subsidy bill and improve its fiscal spending mix, and is also a positive sign in terms of Jokowi's reform intentions going forward.

We have downgraded Indonesia's real GDP growth forecast for 2015 to 5.5% (from 6.0% previously), as we note that tight monetary policy will keep a lid on investment activity throughout H115. That said, this rate still implies an acceleration from 2014's estimated 5.1% growth rate.

The government's subsidy savings, which are estimated at approximately USD18.2bn in 2015, will be channeled towards infrastructure investment as well as direct fiscal transfers for the poor. This should have a stimulative effect on economic growth in 2015, and represents a significantly more efficient spending programme going forward.

Major Forecast Changes

We have downgraded our 2015 average forecast for the Indonesian rupiah to IDR12,694/USD from IDR12,100/USD previously owing to broad US dollar strength. In particular, we note that it will be difficult for the rupiah to recover from current levels even as the country's fundamentals improve, as regional currencies remain under considerable pressure.

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Golkar Infighting Could Sway Parliamentary Balance
The Golkar Party's inability to decide on a single chairman, along with the government's recent ruling that the party will need to solve its
leadership debate internally, have created uncertainties over the future composition of the Indonesian parliament. While the most likely
scenario is for Golkar to remain a single party which identifies itself with the majority Red-and-White coalition, a move to Joko Widodo's
coalition or an outright splintering remain possible.
Table : Politic al Over view
Long-Term Political Outlook
Outlook Improved, But 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 president Joko 'Jokowi' Widodo proves
excessively obstructionist. As such, investors will continue to view Indonesia as one of Asia's riskier destinations.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Modest Growth Pick-Up In 2015, But Structural Reforms Still Needed
While we believe that Indonesia's real GDP growth is likely to accelerate to 5.5% in 2015 from an estimated 5.1% in 2014 on the back
of improving terms of trade and fiscal efficiency, we note that broad structural reforms will be necessary in order to return to the 6.0%+
growth rates that the government is targeting.
TABLE: Economic Activity
Fiscal Policy
Government Capitalises On Oil Collapse With Additional Subsidy Cuts
The decision by President Joko Widodo (Jokowi) to make further cuts to fuel subsidies following the collapse in oil prices is an
unmitigated positive for the government's fiscal policy outlook. In light of an expected savings of approximately USD18.2bn over the
course of 2015, we have downgraded our forecast for the fiscal deficit to 1.9% of GDP, versus 2.2% previously.
TABLE: Fiscal Policy
Monetary Policy
BI To Remain Hawkish Throughout H115 Despite Slow Growth
The current Bank Indonesia (BI) administration has burnished its hawkish credentials over the past one and a half years, and we see
little room for the central bank to shift course over the near term amid a negative real interest rate environment. That said, we believe
that fundamental inflationary drivers remain subdued, and note that headline inflation should return to the central bank's target range
by the end of 2015. While risks to our view are to the upside, we retain our forecast for BI's benchmark rate to end the year at 7.50%,
implying a 25 basis point cut late in Q415.
TABLE: Monetary Policy
Exchange Rate Policy
Regional FX Weakness, Fundamentals Elicit Rupiah Downgrade
The confluence of expectations for further US dollar strength against major global currencies such as the euro and Japanese yen,
along with Indonesia's relatively weak fundamental position at present, have led us to downgrade the unit's 2015 average forecast to
IDR12,694/USD from IDR12,100/USD previously.
TABLE: Curent Account
Chapter 3: 10-Year Forecast
The Indonesian Economy To 2024
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
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operational Risk
Availability Of Labour
TABLE: Asia – Availability Of Labour Risk
TABLE: Labour Force Empl oyment By Sector, 2004-2012 ('000)
Crime Risk
TABLE: Asia – Criminal Risk
Chapter 5: Key Sectors
TABLE: Autos Total Market – Historical Data And Forecasts
Food & Drink
TABLE: Food Consumption Indicators – Historical Data & Forecasts
TABLE: Hot Drink Value/Volume Sales, Production & Trade – Historical Data & Forecasts
TABLE: Mas Grocery Retail Sales By Format – Historical Data & Forecasts
Other Key Sectors
Table: Oil and Gas Sector Key Indicators
Table: Pharma Sector Key Indicators
Table: Infrastructure Sector Key Indicators
Table: Defence & Security Sector Key Indicators
Table: Telecoms Sector Key Indicators
Table: Freight TRANSPORT SECTOR Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Assumptions
Table : Devel oped States , Real GDP Growt H, %
Table : Emergi ng Markets , Real GDP Growth , %

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