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Weekly Report - Risk Off
June 30, 2015 10:20 WIB

Low budget absorption continues to make the headlines, raising more concerns over the government’s execution capabilities. We sense, however, that the government’s sense of urgency is rising, as seen in efforts to prioritize select infrastructure projects for accelerated development. In turn, this should mean a larger chunk of spending materializes in 4Q15. In the near term, however, the Greece crisis might put the IDR under more pressure – a worrying specter for the equity market. 

Low budget absorption due to legacy issues 
Low budget absorption has become a major concern, especially amidst the ongoing economic slowdown, which ultimately will need government spending to spearhead brisker economic growth. The Finance Minister, Bambang Brodjonegoro, recently said that budget absorption had only reached IDR23.2tn, or only 8% of the total 2015 budget. This owes to several reasons, we believe: (i) changes in the nomenclature at several ministries, (ii) a lack of planning, (iii) delays in the auction process and filling in the Budget Implementation Registration Form, (iv) project leaders’ concerns about being embroiled in corruption, (v) unwieldy bureaucracy, (vi) constraints in land acquisition, (vii) the slow process of undertaking environmental impact assessments (AMDAL), which, to our knowledge, mostly stems from long and arduous bureaucratic procedures. With measures taken to rectify these problems, progress should be much smoother next year, in our view. 

Signs of progress and a greater sense of urgency 
During our recent Danareksa Distinguished Speaker event, Bapak Purbaya Yudhi Sadewa, Deputy III for Strategic Issues Management at the Presidential Staff Office, provided further details on the government’s plans to expedite progress. Indeed, the government has now revitalized the Committee of Infrastructure Priorities Development Acceleration, comprising of various ministries, government institutions as well as the police force to deliver better coordination and expedite the process. This strategy is necessary, in our view, especially given the considerable amount of new projects which create greater complexity. The prioritization and selection of key infrastructure projects will be vital. So far, this committee has identified 22 infrastructure projects and classified them according to the level of commencement assurance for better resource deployment. This committee will actively monitor the priority projects and seek to resolve any possible bottlenecks. To counter the ongoing economic slowdown, the government is prioritizing the control of certain market prices, promoting government spending, accelerating infrastructure projects and seeking to improve the investment climate. Although none of these actions are particularly new, the sense of urgency is definitely rising - especially in regard to kick starting government spending. 

The Greece crisis – may weigh on the IDR 
Greece’s economic crisis has entered a new era with the heightened risk of a Euro-zone exit. Over the weekend, the Greece government temporarily imposed capital controls and shut banks. Whilst there is little impact on the Indonesian economy, the IDR may come under some pressure - a worrying specter for the equity market. YTD, the IDR has weakened almost 8%, making it one of the worst-performing currencies in the region. In our view, BI efforts to defend the currency through deployment of forex reserves are increasingly important, especially given the seasonally high USD domestic demand. 

Market volatility lingers, business confidence down 
With the IDR still vulnerable, the JCI remains susceptible to a further correction in the short-term. Arguably, it is difficult to find positive catalysts for the market, especially as most sector data is still relatively soft. Inflation will also enter a seasonally high period, with June’s inflation expected to reach 0.62% m-m, translating into 7.34% y-y inflation, or higher than May’s 7.15%. A recent survey from Danareksa Research Institute on business confidence also paints a bleak picture with most CEOs becoming more negative on current economic conditions. This doesn’t bode well for the business cycle, in our view, leading to a “wait and see” stance on business expansion. In our view, greater government efforts in 2H will be crucial in driving business activity, and we believe that the expected cabinet reshuffle will be used as the opportunity to upgrade the capabilities of the cabinet. In the meantime, investors may have little choice but to embrace the volatility. 

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Trade Outlook

Trade Outlook June 2015
June 10, 2015 16:13 WIB

Indonesia’s exports shrank 4.0 percent MoM in April 2015 after posting a 12 percent increase in the previous month. Compared to April 2014, total exports fell 8.5 percent to US$ 13.1 bn. This was mainly due to the significant decline in oil and gas exports (-26.7 percent MoM) since non oil and gas exports were relatively stable (-0.2 percent MoM). Average aggregate prices and exports volume were also lower: down by 0.5 percent MoM and 3.5 percent MoM, respectively.

Exports of several major product types showed mixed performance on a MoM comparison. Exports of animal and vegetable fats (HS 15) were 17.2 percent higher, while exports of mineral fuels (HS 27) posted a decline (-11.7 percent). Exports of electrical machinery and equipment (HS 85) and jewelry (HS 71) - which contributed 11.7 percent of the total non oil and gas exports - also declined. In the January-April 2015 period, the manufacturing sector accounted for the bulk of Indonesia’s exports (69.8 percent), followed by oil and gas exports (13.7 percent), mining exports (13.0 percent), and agriculture exports (3.4 percent).

Non oil and gas exports to the U.S. and China were up 3.4 percent MoM and 6.3 percent MoM, respectively, while shipments to Japan dropped 11.5 percent. In January-April 2015, the U.S. was at the top of the list of major destination countries (accounting for 11.5 percent of Indonesia’s non oil and gas exports), surpassing Japan (with a 9.9 percent share) and China (9.6 percent).

Imports were stable in April 2015. On the back of a 3.0 percent MoM increase in oil and gas imports and a 0.5 percent decline in non oil and gas imports, total imports rose 0.2 percent MoM to US$ 12.6 bn. The volume of imports was up by 2.9 percent, while average aggregate prices fell 2.7 percent.

By product type, imports of mechanical machinery and equipment (HS 84) were 9.1 percent lower, while imports of electrical machinery and equipment (HS 85) rose by 2.3 percent. Shipments of non oil and gas products from China and Japan were up by 6.4 percent and 3.5 percent, respectively. However, imports from Thailand slumped by 23.8 percent.

By classification of use, imports of raw materials were up (+3.8 percent MoM), while imports of capital goods and consumption goods were lower by 13.6 percent and 2.1 percent. 

Overall, Indonesia recorded a trade surplus of US$ 454.4 mn in April, lower than the surplus of US$ 1.02 bn in the previous month.

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CPI & SBI Outlook

Inflation Outlook March 2015
March 27, 2015 09:26 WIB

Inline with our earlier projection, the headline inflation rate fell further in February 2015. On a MoM comparison, the CPI showed higher deflation of 0.36 percent MoM, or translating into YoY inflation of 6.29 percent. By component, the food and non-food components declined by 0.61 percent and 0.22 percent, respectively.

Prices rose in all CPI components except the foodstuffs and transportation component. In the foodstuffs component, prices fell 1.47 percent due to the start of the harvesting season while in the transportation component prices fell 1.53 percent MoM, largely driven by the impact of the government’s move to cut retail prices of fuel in January. By contrast, prices in the clothing component rose the most (up 0.52 percent), followed by the prepared foods component (+0.45 percent MoM), the housing component (+0.41 percent MoM), the medical care component (+0.39 percent MoM), and the education component (+0.14 percent MoM).

In March, seasonality from the harvesting season will result in downward pressures on prices in the foodstuffs component. The harvesting of crops (especially those grown in paddy fields) will drive rice prices down. March average rice prices remain above the February average level, but shows a declining trend. From the production side, the government targets 73.4 million tons of milled dry grain rice production in 2015, or 3.7 percent higher than last year’s production.

The price of several commodities tend to increase such as red onions, cooking oil, and flour. At the same time, the collapse in global oil prices will help to keep domestic fuel prices stable. Hence, we predict March inflation of 0.16 percent MoM, translating into YoY inflation of 6.38 percent.

In the latest development, Bank Indonesia maintained its benchmark BI rate at 7.50 percent, with the Deposit Facility rate and the Lending Facility rate unchanged at 5.50 percent and 8.00 percent, respectively. The BI’s goal of achieving a healthier current account (2.5-3.0 percent of GDP) was one of the main factors behind BI’s move to keep the BI rate at its current level. However, we continue to believe that there is still scope for further cuts in the benchmark rate given the benign outlook for inflation over the near- term

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Forecast For May 2015

Exports US$ 13.60 bn
Imports US$ 12.50 bn
Trade Balance US$ 1.10 bn

Forecast for 2015

Exports US$ 182.80 bn
Imports US$ 180.30 bn
Trade Balance US$ 2.50 bn

DRI Forecast for May 2015

MoM(%) 0.37
YoY(%) 7.01

End of period(% p.a) 7.50

Forecast for 2015

Inflation(%) 5.04
SBI(% p.a) 7.50