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Indonesia Country Risk Report Q1 2016

  • October 2015
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

Against a backdrop of sticky inflation and a weakening rupiah, BankIndonesia (BI) maintained its benchmark policy rate at 7.50% at itsSeptember 2015 monetary policy meeting. The central bank is likelyto hold off on interest rate cuts until early 2016, when more favourableinflation data should provide a sufficient buffer for BI to easeinterest rate in order to bolster growth. Meanwhile, the rupiah willcontinue to face downward pressure as the government strugglesto boost investor confidence.Indonesian President Jokowi's move to reshuffle his cabinet andreplace key economic ministers with technocrats will be positive forIndonesia's economy. However, we note that the positive effects willonly be realised over the medium term; as such, we maintain ourforecast for Indonesia's GDP growth to come in at 4.8% in 2015.Indonesia's economy is undergoing a difficult transition as it shifts froma commodities export-led model, to one that is more sustainable, ie,export-oriented industrialisation. In order to achieve our average realGDP growth forecast of 5.8% per annum over the next five years,improved reform momentum and faster infrastructure developmentwill be necessary.Indonesia's budget deficit as a share of GDP will likely come in around2.3% in 2015, before widening slightly to 2.5% in 2016. Over thenear term, we expect the fiscal deficit to remain slightly elevated asthe government attempts to spur economic growth by spending oninfrastructure projects.Major Forecast ChangesDue to myriad depreciatory factors including a poor external sectorperformance, a weak economic growth outlook, uncertainty regardingthe timing and trajectory of US interest rate hikes, and fear ofAsian currency devaluations, we expect the Indonesian rupiah tocontinue to face downside pressure against the US dollar over thecoming quarters. As such, we have downgraded our end-2015 andend-2016 forecasts for the rupiah to IDR15,450/USD and IDR16,000/USD, respectively.

Table Of Contents

Indonesia Country Risk Report Q1 2016
Executive Summary.. 5
Core Views...5
Major Forecast Changes.5
Key Risks To Outlook.5
Chapter 1: Political Outlook. 7
SWOT Analysis... 7
BMI Political Risk Index. 7
Domestic Politics .. 8
Cabinet Reshuffle To Boost Medium-Term Growth Outlook...8
Indonesian President Jokowi's move to reshuffle his cabinet and replace key economic ministers with technocrats will be positive for
Indonesia's economy. However, we note that the positive effects will be realised only over the medium term; as such, we maintain our
forecast for Indonesia's GDP growth to come in at 4.8% in 2015.
TABLE: POLITICAL OVERVIEW ..8
Long-Term Political Outlook. 9
Outlook Improved, But Uncertainty Lingers.9
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.
TABLE: CABINET RESHUFFLE9
Chapter 2: Economic Outlook 13
SWOT Analysis. 13
BMI Economic Risk Index 13
Economic Activity ... 14
Growth Recovery Contingent Upon Reform Momentum...14
Indonesia's economy is undergoing a difficult transition as it shifts from a commodities export-led model, to one that is more sustainable,
ie, export-oriented industrialisation. In order to achieve our average real GDP growth forecast of 5.8% per annum over the next five
years, improved reform momentum and faster infrastructure development will be necessary.
TABLE: ECONOMIC ACTIVITY...14
GDP By Expenditure 15
Fiscal Policy.. 16
Fiscal Deficit To Deepen Slightly In 201616
Indonesia's budget deficit as a share of GDP will likely come in around 2.3% in 2015, before widening to 2.5% in 2016. Over the near
term, we expect the fiscal deficit to remain slightly elevated as the government attempts to spur economic growth by spending on
infrastructure projects.
TABLE: FISCAL POLICY.16
TABLE: BUDGET ASSUMPTIONS..16
Structural Fiscal Position.17
Monetary Policy ... 18
BI To Cut Rates In Early 2016...18
Against a backdrop of sticky inflation and a weakening rupiah, Bank Indonesia (BI) maintained its benchmark policy rate at 7.50% at its
September monetary policy meeting. The central bank is likely to hold off on interest rate cuts until early 2016, when more favourable
inflation data should provide a sufficient buffer for BI to ease interest rate in order to bolster growth. Meanwhile, the rupiah will continue
to face downward pressure as the government struggles to boost investor confidence.
TABLE: MONETARY POLICY.18
Monetary Policy Framework 19
TABLE: BMI CURRENCY FORECAST19
Currency Forecast 20
IDR: More Gradual Depreciation In 2016.20
Due to myriad depreciatory factors including a poor external sector performance, a weak economic growth outlook, uncertainty
regarding the timing and trajectory of US interest rate hikes, and fear of Asian currency devaluations, we expect the Indonesian rupiah
to continue to face downside pressure against the US dollar over the coming quarters. As such, we have downgraded our end-2015 and
end-2016 forecasts for the rupiah to IDR15,450/USD and IDR16,000/USD, respectively.
TABLE: CURRENT ACCOUNT20
Structural External Position.21
TABLE: MAIN EXPORT AND IMPORT PARTNERS...21
TABLE: MAIN EXPORTS AND IMPORTS...22
Chapter 3: 10-Year Forecast... 23
The Indonesian Economy To 2024. 23
A Bullish Long-Term Growth Story.23
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.23
Chapter 4: Operational Risk... 25
SWOT Analysis. 25
Operational Risk Index 25
Operational Risk... 26
TABLE: OPERATIONAL RISK.26
Education . 27
TABLE: ASIA - EDUCATION RISK.28
Government Intervention 32
TABLE: ASIA - GOVERNMENT INTERVENTION RISK 32
TABLE: PERSONAL INCOME AND TAX RATE..33
Chapter 5: BMI Global Macro Outlook... 37
Global Outlook.. 37
Global Growth Weak As EMs Squeezed.37
TABLE: GLOBAL ASSUMPTIONS..37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %38
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...39

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