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Indonesia Country Risk Report Q4 2017

Indonesia Country Risk Report Q4 2017

Core Views

We have downgraded Indonesia's economic growth forecast to 5.1%in 2017 as the mining sector is showing little sign of picking up despitethe easing of the mineral export ban, while the manufacturingand retail and wholesale sectors appear to be on a slight downturn.

Rising political risks in the run-up to the 2019 elections are also likelyto weigh on growth going into 2018, although we expect continuedeconomic outperformance relative to its EM peers. Increased savingsin the economy bodes well for investment and the longer-termgrowth outlook.

Following BI's surprise 25bps interest rate cut in August (which bringsthe policy rate to 4.50%), we expect the central bank to remain onhold through the rest of the year. Higher inflation, increasing likelihoodof a rise in global risk aversion, and narrowing real interestspreads against the US will limit room for further easing.

We believe that Indonesia's 2018 budget is highly unrealistic withregards to its revenue targets. As a result of the fiscal deficit cap(3% of GDP), this means that expenditure is likely to be constrained,while infrastructure spending is likely to come in lower than stated.

Indonesia has revealed plans to tighten its anti-terrorism lawswhich should enhance its counter-terrorism capabilities, boding wellfor social stability. The expansion of the definition of terrorism toinclude hard-line groups should also help to curtail the rise of ultraconservativeIslam in the country. However, involving the military isrisky business given that the organisation has a poor track recordwith human rights and abuse of power.

Major Forecast Changes

We have adopted a neutral view on the rupiah over the near-termgiven that the currency has remained stable against the dollar inspite of BI's surprise rate cut in August. A surging CNY and furtherimprovements in the terms of trade will provide support. Over thelonger-term, higher structural inflation and an expensive REER islikely to weigh on the IDR, but a superior growth outlook shouldallow the rupiah to continue to outperform in total returns terms.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth Downgraded But Still To Outperform EM Peers
We have downgraded Indonesia's economic growth forecast to 5.1% in 2017 as the mining sector is showing little sign of picking
up despite the easing of the mineral export ban, while the manufacturing and retail and wholesale sectors appear to be on a slight
downturn. Rising political risks in the run-up to the 2019 elections are also likely to weigh on growth going into 2018, although we expect
continued economic out performance relative to its EM peers. Increased savings in the economy bodes well for investment and the
longer-term growth outlook.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
BI Unlikely To Ease Further In H217
Following BI's surprise 25bps interest rate cut in August (which brings the policy rate to 4.50%), we expect the central bank to remain
on hold through the rest of the year. Higher inflation, increasing likelihood of a rise in global risk aversion, and narrowing real interest
spreads against the US will limit room for further easing.
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Back To Unrealistic Budgets
We believe that Indonesia's 2018 budget is highly unrealistic with regards to its revenue targets. As a result of the fiscal deficit cap
(3% of GDP), this means that expenditure is likely to be constrained, while infrastructure spending is likely to come in lower than
stated.
TABLE: SUMMARY OF PROPOSED 2018 BUDGET AND BUDGET IN PREVIOUS YEARS
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Currency Forecast
IDR: Stability To Hold, Outperformance In Total Return Terms
We have adopted a neutral view on the rupiah over the near-term given that the currency has remained stable against the dollar in spite
of BI's surprise rate cut in August. A surging CNY and further improvements in the terms of trade will provide support. Over the longerterm,
higher structural inflation and an expensive REER is likely to weigh on the IDR, but a superior growth outlook should allow the
rupiah to continue to outperform in total returns terms.
TABLE: BMI CURRENCY FORECAST
Contents
Chapter 2: 10-Year Forecast
The Indonesian Economy To 2026
A Bullish Long-Term Growth Story
Indonesia's large domestic demand base and wealth of natural resources 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
Anti-Terrorism Law Positive For Social Stability, But Stakes Are High
Indonesia has revealed plans to tighten its anti-terrorism laws which should enhance its counter-terrorism capabilities, boding well
for social stability. The expansion of the definition of terrorism to include hard-line groups should also help to curtail the rise of ultraconservative
Islam in the country. However, involving the military is risky business given that the organisation has a poor track record
with human rights and abuse of power.
TABLE: POLITICAL OVERVIEW
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
Operational Risk
TABLE: OPERATIONAL RISK
Labour Costs
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
Legal Environment
TABLE: JAKARTA BUREAUCRATIC PROCEDURES
Chapter 5: BMI Global Macro Outlook
As Good As It Gets?
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: INDONESIA – MACROECONOMIC DATA & FORECASTS

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