Indonesia Infrastructure Update

Transcription

1. Indonesia Stabilization In Foreign Reserves Source : CEIC, UOB Global Economics & Markets Research Infrastructure Spending Driving Growth Indonesia’s GDP growth accelerated to 5.04% y/y in 4Q15 from 4.74% in 3Q15. The upside surprise was mainly from gross fixed capital formation while household private consumption growth remained stable. With further declines in commodity prices, Indonesian exports of goods and services contracted for the fifth consecutive quarter at -6.44% y/y in 4Q15 (3Q15: -0.6%), the low base not providing much relief to the export sector. For the full-year, Indonesia economy grew by a weaker 4.79% from 5.02% in 2014. Despite the stronger GDP turnout in 4Q15, we keep a cautious outlook for growth in 2016, primarily due to the global trade recession and weakness in commodities. Continuing the weak trend, merchandise exports contracted by 14.3% y/y in JanFeb. Nonetheless, we still expect fixed investment to outperform as infrastructure projects get pushed ahead. Our growth forecast for 2016 remains at 5.0%, lower than Bank Indonesia’s (BI) forecast of 5.25.6%. We see risks from weaker realization of infrastructure spending and uncertain commodity prices. With delay in the parliamentary debate of the tax amnesty to April, potential revenue shortfall could also constrain government’s spending on infrastructure amid the drop in oil revenue. Pace Of Monetary Easing To Slow In 2Q16 BI has resumed its rate cut cycle in January after a 10-month break, cutting its policy rate by 25 bps for the third consecutive month to 6.75% in March. The bias is towards further monetary easing to support growth as commodity prices remain under pressure. Credit growth has slowed since 2H14 while lower inflation since late 2015 and IDR stability have provided the leeway to cut rates. Domestic inflation is expected to stay subdued this year on the assumption of low commodity prices and a relatively high base effect. We expect an average headline inflation of 4.2% in 2016 with December rate at around 4.4% y/y. This is still comfortably in BI’s 3.0-5.0% target. Going forward, the monetary policy space depends on a very gradual interest rate hike expectation for the US Fed, subdued USD bn 140 120 100 80 60 40 20 0 Jan 10 Jan 11 Jan 12 Jan 13 International Reserves Jan 14 Jan 15 Jan 16 IDR-denominated Gov Bonds Held By Foreigners How Much More Can BI Cut? Source: CEIC, UOB Global Economics & Markets Research 9.0 UOB's forecast 8.0 7.0 6.0 5.0 4.0 3.0 Jan 10 Sep 10 May 11 Jan 12 Sep 12 May 13 Jan 14 BI Rate (%) domestic inflation and stability in the IDR. If these conditions are met, it is conceivable that BI will be inclined to maintain an easing bias in 2Q16. After front-loading 75 bps rate cut in 1Q16, we expect a more moderate pace of easing in 2Q16 as we do not think current pace can be sustained. For now, we are penning down only another 25 bps rate cut in 2Q16. Weaker Infrastructure Investment Realization Could Sap Positive Sentiment USD/IDR has eased sharply in 1Q16, briefly sinking below 13,000 to 10-month low of 12,984 in March. In the first two months of this year, net foreign funds inflows into Indonesia’s stocks and IDRdenominated government bonds recorded US$0.1 bn and US$2.1 bn respectively. Some recovery in oil prices since midFebruary has also contributed to the positive tone in IDR. The currency has outperformed with gains of more than 29 Quarterly Global Outlook 2Q2016 UOB Global Economics & Markets Research Sep 14 May 15 Jan 16 Sep 16 CPI (y/y %) UOB Economic Projections 2014 2015 2016F 2017F GDP 5.0 4.8 5.0 5.5 CPI (average, y/y %) 6.4 6.4 4.2 5.2 Unemployment rate (%) 5.9 6.2 6.0 5.8 Current account (% of GDP) -3.1 -2.1 -2.7 -2.8 Fiscal balance (FY, % of GDP) -2.3 -2.8 -2.2 -2.3 5% against USD ytd (as at 17 March). However, with the divergence in the interest rate trajectories in the US and Indonesia, near-term downside to USD/ IDR may be limited. We expect the pair to trade sideways, ending 2Q16 at 13,000 and rising to 13,200 by end-4Q16 on expectation that US Fed hike trajectory could pick up next year. Key risks to IDR are likely to stem from a more aggressive monetary easing in Indonesia, worse-thanexpected current account deficit, weaker infrastructure investment realization as well as EM market risk aversion.