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Indonesia Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

Indonesia's budget deficit as a share of GDP will likely deepen furtherto 2.5% in 2016, from our forecast of 2.3% in 2015, due to higherdevelopmental expenditures and lower-than-projected revenue realisation.This could potentially exert upside pressure on Indonesia'ssovereign bond yields over the coming quarters as the governmentwill have to tap on the bond market to finance its revenue shortfall.Bank Indonesia will likely ease its monetary policy over the comingmonths once it has assessed the market's reaction to the FederalFund Rate (FFR) hike and confirmed the downtrend in inflation.However, the central bank is likely to remain relatively cautious givenongoing volatility in the rupiah, and we expect a relatively shallowrate cutting cycle of 50bps.

We remain bearish on the Indonesian rupiah over the short and mediumterm, and expect the currency to weaken further to IDR14,600/USD by end-2016 and IDR14,800/USD by end-2017. Over the courseof 2016, weak economic growth momentum, external headwindsand diverging monetary policies will likely continue to underminethe rupiah.Although the pro-reform Jokowi administration has been activelytrying to reduce bureaucratic red tape and boost investor confidence,political infighting due to vested interest and nationalistic sentimentamong the political elites have hampered the progress and efficacyof these positive developments. This will likely act as a drag on thecountry's economic recovery over the coming year; as such, wemaintain our forecast for Indonesia's economy to accelerate onlymoderately in 2016, with a forecasted real GDP expansion of 5.2%.Major Forecast ChangesIndonesia's real GDP growth will pick up over the coming quarterson the back of stronger investment and government spending, butpersistent domestic and external headwinds will likely cap upsidepotential. As such, we have downgraded Indonesia's real GDPgrowth forecast for 2016 to 5.2%, from 5.6% previously.

Table Of Contents

Indonesia Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks 5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth Headwinds To Persist Into 20168
Indonesia's real GDP growth will pick up over the coming quarters on the back of stronger investment and government spending, but
persistent domestic and external headwinds will likely cap upside potential As such, we have downgraded Indonesia's real GDP growth
forecast for 2016 to 52%, from 56% previously
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
Fiscal And Public Debt Outlook 10
Widening Deficit To Keep Government Bond Yields Elevated10
Indonesia's budget deficit as a share of GDP will likely deepen further to 25% in 2016, from our forecast of 23% in 2015, due to higher
developmental expenditures and lower-than-projected revenue realisation This could potentially exert upside pressure on Indonesia's
sovereign bond yields over the coming quarters as the government will have to tap on the bond market to finance its revenue shortfall
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS10
TABLE: KEY BUDGET ASSUMPTIONS11
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
Currency Forecast 13
IDR: Downtrend To Persist13
We remain bearish on the Indonesian rupiah over the short and medium term, and expect the currency to weaken further to IDR14,600/
USD by end-2016 and IDR14,800/USD by end-2017 Over the course of 2016, weak economic growth momentum, external headwinds
and diverging monetary policies will likely continue to undermine the rupiah
TABLE: BMI CURRENCY FORECAST 13
Outlook On External Position 14
TABLE: MAIN EXPORT AND IMPORT PARTNERS14
TABLE: MAIN EXPORTS AND IMPORTS15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE15
Monetary Policy 16
BI To Embark On Rate Easing Cycle In 201616
Bank Indonesia will likely ease its monetary policy over the coming months once it has assessed the market's reaction to the Federal
Fund Rate (FFR) hike and confirmed the downtrend in inflation However, the central bank is likely to remain relatively cautious given
ongoing volatility in the rupiah, and we expect a relatively shallow rate cutting cycle of 50bps
Monetary Policy Framework 16
Chapter 2: 10-Year Forecast 19
The Indonesian Economy To 2025 19
A Bullish Long-Term Growth Story19
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 FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestic Politics 22
Administrative Obstacles To Curtail Policy Effectiveness22
Although the pro-reform Jokowi administration has been actively trying to reduce bureaucratic red tape and boost investor confidence,
political infighting due to vested interest and nationalistic sentiment among the political elites have hampered the progress and efficacy
of these positive developments This will likely act as a drag on the country's economic recovery over the coming year; as such, we
maintain our forecast for Indonesia's economy to accelerate only moderately in 2016, with a forecasted real GDP expansion of 52%
TABLE: POLITICAL OVERVIEW 22
TABLE: KEY TAKEAWAYS 23
Long-Term Political Outlook 24
Outlook Improved, But Uncertainty Lingers24
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
Chapter 4: Operational Risk 27
SWOT Analysis 27
Operational Risk Index 27
Operational Risk 28
TABLE: OPERATIONAL RISK28
Trade Procedures and Governance 29
TABLE: EXPORT and IMPORT DOCUMENTS29
TABLE: TRADE PROCEDURES BREAKDOWN29
TABLE: TRADE PROCEDURES AND GOVERNANCE RISK 30
Vulnerability To Crime 31
Chapter 5: BMI Global Macro Outlook 35
Global Macro Outlook 35
Unfinished Business In 201635
TABLE: GLOBAL ASSUMPTIONS 35
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 36
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 36
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 37
TABLE: INDONESIA - MACROECONOMIC DATA and FORECASTS 39

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