Market Research Logo

Indonesia Country Risk Report Q2 2016

Indonesia Country Risk Report Q2 2016

Core Views

Indonesia's budget deficit as a share of GDP will likely deepen furtherto 2.5% in 2016, from our forecast of 2.3% in 2015, due to higherdevelopmental expenditures and lower-than-projected revenue realisation.

This could potentially exert upside pressure on Indonesia'ssovereign bond yields over the coming quarters as the governmentwill have to tap on the bond market to finance its revenue shortfall.

Bank Indonesia will likely ease its monetary policy over the comingmonths once it has assessed the market's reaction to the FederalFund Rate (FFR) hike and confirmed the downtrend in inflation.

However, the central bank is likely to remain relatively cautious givenongoing volatility in the rupiah, and we expect a relatively shallowrate cutting cycle of 50bps.

We remain bearish on the Indonesian rupiah over the short and mediumterm, and expect the currency to weaken further to IDR14,600/USD by end-2016 and IDR14,800/USD by end-2017. Over the courseof 2016, weak economic growth momentum, external headwindsand diverging monetary policies will likely continue to underminethe rupiah.

Although the pro-reform Jokowi administration has been activelytrying to reduce bureaucratic red tape and boost investor confidence,political infighting due to vested interest and nationalistic sentimentamong the political elites have hampered the progress and efficacyof these positive developments. This will likely act as a drag on thecountry's economic recovery over the coming year; as such, wemaintain our forecast for Indonesia's economy to accelerate onlymoderately in 2016, with a forecasted real GDP expansion of 5.2%.

Major Forecast Changes

Indonesia's real GDP growth will pick up over the coming quarterson the back of stronger investment and government spending, butpersistent domestic and external headwinds will likely cap upsidepotential. As such, we have downgraded Indonesia's real GDPgrowth forecast for 2016 to 5.2%, from 5.6% previously.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth Headwinds To Persist Into 2016
Indonesia's real GDP growth will pick up over the coming quarters on the back of stronger investment and government spending, but
persistent domestic and external headwinds will likely cap upside potential. As such, we have downgraded Indonesia's real GDP growth
forecast for 2016 to 5.2%, from 5.6% previously.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
Fiscal And Public Debt Outlook
Widening Deficit To Keep Government Bond Yields Elevated
Indonesia's budget deficit as a share of GDP will likely deepen further to 2.5% in 2016, from our forecast of 2.3% in 2015, due to higher
developmental expenditures and lower-than-projected revenue realisation. This could potentially exert upside pressure on Indonesia's
sovereign bond yields over the coming quarters as the government will have to tap on the bond market to finance its revenue shortfall.
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: KEY BUDGET ASSUMPTIONS
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Currency Forecast
IDR: Downtrend To Persist
We remain bearish on the Indonesian rupiah over the short and medium term, and expect the currency to weaken further to IDR14,600/
USD by end-2016 and IDR14,800/USD by end-2017. Over the course of 2016, weak economic growth momentum, external headwinds
and diverging monetary policies will likely continue to undermine the rupiah.
TABLE: BMI CURRENCY FORECAST
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
BI To Embark On Rate Easing Cycle In 2016
Bank Indonesia will likely ease its monetary policy over the coming months once it has assessed the market's reaction to the Federal
Fund Rate (FFR) hike and confirmed the downtrend in inflation. However, the central bank is likely to remain relatively cautious given
ongoing volatility in the rupiah, and we expect a relatively shallow rate cutting cycle of 50bps.
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Indonesian Economy To 2025
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 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Administrative Obstacles To Curtail Policy Effectiveness
Although the pro-reform Jokowi administration has been actively trying to reduce bureaucratic red tape and boost investor confidence,
political infighting due to vested interest and nationalistic sentiment among the political elites have hampered the progress and efficacy
of these positive developments. This will likely act as a drag on the country's economic recovery over the coming year; as such, we
maintain our forecast for Indonesia's economy to accelerate only moderately in 2016, with a forecasted real GDP expansion of 5.2%.
TABLE: POLITICAL OVERVIEW
TABLE: KEY TAKEAWAYS
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 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures and Governance
TABLE: EXPORT & IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: TRADE PROCEDURES AND GOVERNANCE RISK
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: INDONESIA – MACROECONOMIC DATA & FORECASTS

Download our eBook: How to Succeed Using Market Research

Learn how to effectively navigate the market research process to help guide your organization on the journey to success.

Download eBook

Share this report