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Market Outlook: RAPBN-P 2015
January 21, 2015 09:17

Details of draft state budget 2015 is out, and it is encouraging to see government’s clear effort to encourage growth, allocating greater spending on a more productive sector. Reductions in subsidy have opened greater opportunity for the government to make an opportune spending to boost growth.

On revenue side, an increase in tax revenue will be the main source of funding, which saw an increase of 7.6% vs previous 2015 budget to IDR1,485t, with tax to GDP ratio improved to 13.6%. Higher tax income is critical, in our view, especially with considerable decline on crude oil price, which have great consequence on government’s non-tax income. The main support to the increase in tax income would come from: income tax (up 5.6%), VAT (up 9.8%) and excise tax (up 11.8%). On the latter, it will mainly come from excise on tobacco (up 12.9%). Given higher dependency toward tax related income, bigger tax revenue target this year would add pressure as any poor execution on this front would lead to the speed of progress on most of government development target.

In term of spending, there are eight ministries which got budgets allocation of above Rp40tn, and from those ministries, transportation and public works sector got the biggest increment. In our view, this would signify government clear target to improve the current dis-connectivity all across Indonesia, which is supportive for medium to long term growth. The Ministry of Public Works and Public Housing saw an increment of 40.6% allocation to IDR119t, while Ministry of Transportation get 44.7% higher budget of IDR65t. From only an average of 6.2% of total expenditures during the MP3EI period, the government’s budget allocation to these two ministries has been considerably increased to 9.2% for 2015.

On macro assumption, the economic growth of 5.8% is quite challenging to achieve, in our view, and would arguably require impeccable execution capability to accelerate growth momentum.

We continue to believe that SOEs will serve as the agents of growth, especially with a more commitment from government to improve capital based by allocating IDR72t budget this year, a massive leap from a mere IDR5.1t. However, there’s also a new associated risk for SOEs, as seen in the recent surprising move of the government to cut cement price produced by SOEs which was beyond our expectation since we had believed that pricing at the micro level would be solely determined by supply/demand dynamics, and that any government intervention would have unnecessary implications as reflected in the growing concern from investors that similar controls could be imposed in other sectors where SOEs are dominant. In our view, it is too early to conclude that such fears are warranted.

We continue to pitch our 10 top picks in 2015: BMRI, BBRI, TLKM, SMGR, PTPP, WSKT, ACES, ICBP, INCO and BSDE.

Please find the attached files our report on the draft revised budget as well as the impact to the construction sector.