We believe that signs of overheating as a result of Bank Indonesia's easy monetary policy are beginning to emerge, a phenomenon that will begin to unwind as we move into 2013. This, combined with declining external demand and a challenging outlook for commodities, has led us to materially downgrade our 2013 GDP forecast to 5.6% from 6.4% previously, in line with slowing investment growth. Still, we note that even with this downgrade, we expect Indonesia to remain a regional outperformer.
The government has missed another key window in which it could have reformed its costly and unwieldy fuel subsidy regime, and politicians will be hard-pressed to find an answer to this ongoing conundrum as 2014 elections loom ever closer. Although the government has proposed a solid 15.0% capital spending increase in 2013, this will be overshadowed by an even larger 18.0% in subsidy spending.
Major Forecast Changes
We have upgraded our headline GDP growth forecast for 2012 from 5.4% to 6.0% as a result of a stronger than expected performance in H112. At the same time, we have downgraded our 2013 forecast from 6.4% to 5.6%. Following Indonesia's largest quarterly current account deficit on record in Q212, we have downgraded our 2012 current account forecast from a small surplus of US$1.2bn to a deficit of US$12.7bn, or -1.4% of GDP.
Although Indonesia continues to face a challenging trade outlook, we note that the economy is considerably more robust than it was prior to the crises of 1997 and 2008, and thus continue to believe that an external crisis is not in the cards. With the government yet to get serious on the topic of subsidy reform, we have upgraded our 2013 fiscal deficit forecast to 2.7% of GDP versus 2.2% previously, while we continue to expect 2012's deficit to hit 3.0% versus just 2.1% in 2011.
Table of Contents
Executive Summary
Core Views
Major Forecast Changes
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Leading Presidential Candidates Signal Rise Of Populism
Although Indonesia's presidential elections are not to be held until 2014, candidates have already begun to shore up support among
the nation's electorate The three current front-runners (Prabowo Subianto, Megawati Sukarnoputri, and Aburizal Bakrie) are all familiar
faces, but one of the most common threads between them thus far is a preference for nationalistic policies
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Outlook Improved, But Uncertainty Lingers
Although Indonesia has returned to relative orderliness since the chaos of the late 1990s and early 2000s, the country faces multiple
challenges and threats to its stability that could flare up again if President Susilo Bambang Yudhoyono or his successor proves
incompetent or if improved governance fails to take hold As such, investors will continue to view Indonesia as one of Asia's riskier
destinations
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Domestic Economy Resilient, But 2013 Slowdown Looms
The Indonesian economy's strong H112 performance has led us to upgrade our 2012 GDP forecast to 6 0% from 5 4% However, we
believe that signs of overheating as a result of Bank Indonesia's easy monetary policy are beginning to emerge, a phenomenon that will
begin to unwind as we move into 2013
TABLE: ECONOMIC ACTIVITY
Fiscal Policy
Infrastructure Boost Overshadowed By Ballooning Subsidies
President Yudhoyono's 2013 budget looks set to focus on increased infrastructure development, with capital spending set to rise by
a solid 15 0% However, with a planned 18% increase in energy subsidies, the budget also indicates that the government has yet to
get serious on the topic of subsidy reform As a result, we have upgraded our 2013 fiscal deficit forecast to 2 7% of GDP versus 2 2%
previously, while we continue to expect 2012's deficit to hit 3 0% versus just 2 1% in 2011
TABLE: FISCAL POLICY
Balance Of Payments
Current Account Plummets, But Risk Of Crisis Remote
Following Indonesia's largest quarterly current account deficit on record in Q212, we have materially downgraded our 2012 current
account forecast from a small surplus of US$1 2bn to a deficit of US$12 7bn, or -1 4% of GDP Although Indonesia continues to face a
challenging trade outlook, we note that the economy is considerably more robust than it was prior to the crises of 1997 and 2008, and
thus continue to believe that an external crisis is not in the cards
TABLE: CURRENT ACCOUNT
Monetary Policy
Regional Easing Presents Growing Risks To BI Hike View
Following Bangko Sentral ng Pilipinas (BSP)'s interest rate cut on July 26, we acknowledge the growing risk that Bank Indonesia (BI)
will look to keep its benchmark rate in an uncomfortable holding pattern in order to avoid diverging from the regional trend However, our
core view continues to be for a 25 basis point (bps) interest rate hike to 6 00% from BI, as we believe that it would help to address the
triple threat of hot money outflows, rupiah weakness and growing inflationary pressures (on the back of surging credit growth) that the
country is likely to face over the coming months
TABLE: MONETARY POLICY
Chapter 3: 10-Year Forecast
The Indonesian Economy To 2021
A Bullish Long-Term Growth Story
Indonesia's large domestic demand base and exposure to commodities are two key factors driving our bullish growth outlook for the
next decade That said, government policy reform will be crucial in determining if the country can reach its real growth potential
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
Infrastructure
TABLE: LABOUR FORCE QUALITY
TABLE: ASIA, ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
Market Orientation
TABLE: TOP EXPORT DESTINATIONS, 2001-2008 (US$MN)
Operational Risk
Chapter 5: Key Sectors
Pharmaceuticals
TABLE: PHARMACEUTICAL SALES, 2008-2016
TABLE: PRESCRIPTION DRUG SALES, 2008-2016
TABLE: PATENTED DRUG SALES, 2008-2016
TABLE: OTC MEDICINE SALES, 2008-2016
TABLE: MEDICAL DEVICE SALES, 2009-2016
TABLE: GENERIC DRUG SALES, 2008-2016
Telecommunications
TABLE: TELECOMS SECTOR – INTERNET – HISTORICAL DATA AND FORECASTS
TABLE: FIXED-LINE HISTORICAL DATA & FORECASTS
TABLE: MOBILE HISTORICAL DATA & FORECASTS
TABLE: ARPU HISTORICAL DATA & FORECASTS (IDR)
Other Key Sectors
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD & DRINK SECTOR KEY INDICATORS
TABLE: OIL & GAS SECTOR KEY INDICATORS
TABLE: DEFENCE & SECURITY SECTOR KEY INDICATORS
TABLE: FREIGHT KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
A Pivotal Autumn Approaches
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 47
