Berita & Riset
- Riset Terkini
|Weekly Report: Light at the end of the tunnel|
|November 18, 2014 10:02|
Light at the end of the tunnel
Clarity has finally emerged with last night's announcement on fuel price hikes. With the price of crude oil continuing to weaken, Jokowi enjoyed greater policy flexibility to strike a better balance between savings from subsidy cuts and the potentially adverse impact on the macro economy (particularly in relation to inflation, interest rates, economic growth and the rupiah). Also, with a IDR2,000/liter fuel price hike, the potential macro impact will be less. Meanwhile, Jokowi’s debut on the international stage has also created more confidence, especially given his call for greater foreign investment and increased infrastructure development in addition to his pledge to reduce costly fuel subsidies. An improvement in the CAD and reconciliation of the two parliamentary factions are other positive factors.
Fuel price hikes of IDR2,000/liter
One of the biggest market overhangs has now been removed with last night's announcement on fuel price hikes. During his recent international trip, Jokowi repeatedly mentioned the importance of fuel price hikes in not only supporting infrastructure spending, but also in bringing about much-needed reform to Indonesia’s economy. In light of the lower crude oil price, Jokowi enjoyed greater policy flexibility to strike a better balance between savings from subsidy cuts and the potentially adverse impact on the macro economy. As such, Jokowi has been able to hike fuel prices less aggressively whilst still attaining similar fuel subsidy savings. With IDR2,000/liter price increases for petroleum and diesel fuel (30% - 36% increases), the impact on inflation will be moderate with inflation expected to go up to 7.5% by the end of 2014 and to 6.8% by the end of 2015, with potential subsidy savings of IDR100t.
Although Jokowi’s strong commitment to raising fuel prices will be welcomed by the market, the risk of higher interest rates following a spike in inflation will remain. Nonetheless, potential downside to the market appears limited especially with the expected major transformation of Indonesia's overall economy, which will create stronger foundations for business to flourish. In fact, if Jokowi’s cabinet can hasten its work program, then the macro volatility arising from the fuel price hikes could be potentially offset. Over the longer term, we continue to be positive on the market and any weakness in share prices should be seen as an opportunity to subscribe to Indonesia’s solid LT story. We continue to like big cap defensive stocks and infrastructure plays. The healthcare sector might also get a boost.
Impressive international debut
Jokowi’s first appearance on the international stage appears to have given a timely shot in the arm to investor confidence, especially since Indonesia’s new president said that he would welcome greater investment in the country. At the three events (APEC, ASEAN Summita and G20), Jokowi continuously promoted his one door policy which will facilitate access to investment opportunities in Indonesia. On top of this, President Jokowi also set forth his plans to speed up infrastructure development. The equity market responded positively to these developments, with foreign inflows dominating last week’s trading.
An improvement on the CAD is positive
The CAD has been one of the factors holding back macro-economic improvements, especially in regard to the currency. Indeed, with the CAD in mind, BI has continued to adopt tight monetary policy to stifle economic growth in a bid to bring down imports. The recent 3Q14 CAD figures, however, provide some short-term relief with the CAD easing to 3.07% from 4.06% in 2Q14. Furthermore, with some relaxation in export restrictions, we believe this improvement can continue into 4Q14. This, in turn, suggests that BI will have room to relax its currently tight monetary policy going forward, even in the face of potential macro volatility following the fuel price hikes. In relation to Jokowi’s efforts to further bolster FDI, this could lead to higher imports going forward, especially of raw materials. Nonetheless, greater investment and more spending on much-needed infrastructure projects would undoubtedly hasten economic growth, a definite positive for the equity market over the longer term.
Parliamentary factions to make a peace deal
On the political front, there is finally light at the end of the tunnel after the two parliamentary camps moved towards reconciliation. In our view, despite having fewer seats in parliament, Jokowi’s camp has successfully been able to get opposition parties to agree to its demands, including agreement in relation to some leadership posts of internal bodies in addition to changes in the current Legislative Institutions Law (MD3 Law). However, this does not necessarily mean a smooth road ahead for Jokowi’s government, since Jokowi’s desire to instigate major policy reforms could still face obstacles in the future.