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OTG Indonesia – Reality Check

By Standard Chartered Bank


President Joko Widodo (Jokowi) appears to be struggling to deliver on his promises to the electorate. Some polls suggest the president’s popularity has waned since he assumed office in October 2014. The Jokowi administration is unlikely to meet many of its ambitious economic targets for 2015, including the 5.7% real GDP growth target and 30% increase in tax revenues from last year. We believe financial market players and investors should moderate their expectations of the Jokowi government.

We think an unfavourable global and domestic environment is making it difficult for the government to meet its targets. Weak commodity prices are hampering exports (almost 50% of which are commodity-based). FDI has slowed as a result of pressure on the Indonesian rupiah (IDR) on market concerns over the current account (C/A) deficit and risk of capital outflows when the US Fed starts hiking policy rates. Meanwhile, household consumption and investment slowed in Q1-2015, presumably due to Bank Indonesia‘s (BI’s) monetary tightening stance and slowing economic activity in commodity-producing provinces. Government spending on infrastructure, which was expected to propel real GDP growth this year, also slowed in Q1.

Factoring in recent developments in Indonesia’s economy and the global environment, we revise our real GDP growth forecasts to 4.9% (from 5.2%) for 2015 and 5.3% (from 5.5%) for 2016. We maintain our year-end headline inflation forecasts at 3.7% y/y for 2015 and 4.5% y/y for 2016, but adjust our annual average forecasts to 6.5% (from 6.0%) and 4.5% (from 5.0%). We maintain our call on the BI rate – a 25bps rate cut in Q2 (presumably in May) and 25bps hikes each in Q3 and Q4, to reach 7.75% by end-2015.

We maintain a Neutral outlook on IDR bonds. Although IDR bond valuations have turned somewhat attractive, we see scope for further improvement. The key near-term concerns are IDR weakness and slowing foreign demand for IDR bonds. Given renewed market expectations of further monetary easing, and its spill-over impact on the IDR, we revise higher our trajectory forecast for IDR bond yields.

We maintain our view of continued IDR weakness in the coming months. We keep our USD-IDR forecast at 13,700 by mid-2015 and 13,500 by end-2015. With both domestic and external market conditions favouring an acceleration in IDR weakness, we revise down our short-term FX weighting on the IDR to Underweight from Neutral.

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