Core Views The election results will ultimately depend on whether the electorate clamours for reform or stability. If the preference is for the former, current Governor of Jakarta Joko Widodo (Jokowi) from the PDI-P will likely emerge victorious. If the inclination is towards stability, hard-charging ex-general Prabowo Subianto, from the Gerindra, could yet achieve a come-from-behind victory. While we continue to view Jokowi as the favourite, the polling gap between the two candidates has closed markedly, suggesting that the race will be a close one. While his policy platform has not yet been fully elaborated, Jokowi's ability to streamline bureaucratic inefficiencies, improve public finances, strike a balance between pro-business and pro-welfare policies, as well as willingness to take politically unpopular but necessary measures to right economic imbalances could provide some upside potential for the infrastructure, mining and oil and gas sectors.
With inflation remaining well above Bank Indonesia's (BI) target range, we believe that the central bank will look to retain its tight monetary policy stance for the time being. However, we still envisage one interest rate cut before the end of Q414 as BI shifts towards a more growth supportive stance amid a slowing economy.
Major Forecast Changes We have downgraded our end-2014 forecast on the Indonesian rupiah to IDR11,500/USD, from IDR11,000/USD previously, owing to the currency's recent weakness, as well as the heightened volatility that Indonesian assets have witnessed ahead of presidential elections. Should Prabowo Subianto win the election, we believe that further downside risk may come to fruition as a fresh sell-off could take shape.
Table Of Contents
Indonesia Business Forecast Report Q4 2014 Executive Summary.... 5 Core Views..5 Major Forecast Changes5 Key Risks To Outlook....5 Chapter 1: Political Outlook.. 7 SWOT Analysis.... 7 BMI Political Risk Ratings. 7 Domestic Politics .... 8 Golkar-Gerindra Tie-Up Complicates Jokowi's Ascendance..8 Although we still consider the Democratic Party of Struggle's presidential candidate Joko Widodo to be the frontrunner in July's upcoming election, we note that the decision by the second and third largest political parties (Golkar and Gerindra respectively) to align presents a potential challenge to Jokowi's mandate. As such, political risk in Indonesia remains in a highly fluid state, with the upcoming presidential election and ensuing consolidation set to mark a potentially crucial turning point. Tab le: Politica l Overview ...8 Long-Term Political Outlook 10 Outlook Improved, But Uncertainty Lingers.10 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's successor proves incompetent or if improved governance fails to take hold. Chapter 2: Economic Outlook.. 13 SWOT Analysis.. 13 BMI Economic Risk Ratings. 13 Economic Activity . 14 Re-Acceleration Unlikely Before 2015.14 Economic growth in Indonesia has likely not yet found a bottom despite Q114's weak real GDP figure (5.2% year-on-year, as the recent imposition of the mineral ore export ban as well as relatively tight monetary policy continue to act as drags on exports and investment. However, we continue to believe that the investment outlook will improve somewhat beginning next year as investor confidence returns amid an easier monetary policy environment, and we therefore retain our real GDP growth forecast of 6.0% for 2015. table: Economic Activity ...14 Fiscal Policy . 16 Election Looms Large As Fiscal Troubles Resurface.16 Indonesia's fiscal position has once again come under pressure owing to the country's burdensome fuel subsidy programme, and the country's slowing economy (along with rising oil prices) will likely result in a deficit above 2.0% of GDP in 2014. table: Fiscal Policy ...16 Monetary Policy 17 Rate Cut Expectations Delayed As BI Fights Inflation, Trade Deficit..17 Despite slowing economic growth, Bank Indonesia will likely retain its tight monetary policy stance over the coming months as it looks to battle stubborn inflation as well as an ongoing external deficit. As such, we have pared back our expectations for interest rate cuts before the end of 2014, and now see the central bank pursuing just one cut equivalent to 25 basis points before the end of Q414. table: Monetary Policy.18 Exchange Rate Policy 18 Political Uncertainty Warrants Rupiah Downgrade.18 The Indonesian rupiah has been buffeted by rising volatility in the country's financial markets owing to political uncertainty ahead of July's presidential elections. Should the favourite Joko Widodo emerge victorious, we believe that the volatility should subside as political uncertainty recedes. table: Current Account19 table: BMI CURRENCY FORECAST...20 Chapter 3: 10-Year Forecast 21 The Indonesian Economy To 2023. 21 A Bullish Long-Term Growth Story21 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..21 Chapter 4: Business Environment 23 SWOT Analysis.. 23 BMI Business Environment Risk Ratings 23 Business Environment Outlook 24 Institutions.... 24 Table: BMI Business And Operation Risk Ratings...24 Tab le: BMI Lega l Fram ework Rati ng...25 Infrastructure 26 Tab le: Lab our Force Qua lity .26 TABLE : ASIA - ANN UAL FDI INFLO WS...27 Table: Trade And Investment Ratings....28 Market Orientation.. 29 TABLE : INDONE SIA's TOP EXPOR T DESTINATION S, 2001-2008 ..29 Operational Risk .... 30 Chapter 5: Key Sectors.. 33 Pharmaceuticals and Healthcare.. 33 table: Pharmaceutical Sales, Historical Data and Forecasts.34 tab le: Government Healthca re Exp enditu re Trends , Hist orica l Data and Forecasts ... 35 tab le: Healthca re Exp enditu re Trends , Hist orica l Data and Forecasts 35 tab le: Privat e Healthca re Exp enditu re Trends , Hist orica l Data and Forecasts .... 36 Telecommunications... 37 tab le: Telecoms Sect or - Mobi le - Hist orica l Data and Forecasts (Indonesia 2011-2018) 37 tab le: Telecoms Sect or - Wireline - Hist orica l Data and Forecasts (Indonesia 2011-2018). 38 Other Key Sectors.. 41 table: Oil and Gas Sector Key Indicators.41 table: Defence and Security Sector Key Indicators....41 table: Infrastructure Sector Key Indicators.41 table: Food and Drink Sector Key Indicators...42 table: Autos Sector Key Indicators.42 table: Freight Key Indicators....42 Chapter 6: BMI Global Assumptions. 43 Global Outlook... 43 Global Recovery Still On Track..43 Table: Global Assumptions....43 Tab le: Developed Stat es, Real GDP Growt H, %.44 Tab le: BMI VER SUS BLOO MBER G CON SEN SUS RE AL GDP GRO WTH FORE CASTS, %.. 44 Tab le: Em ergi ng Markets , Real GDP Growth , %45