On 9 February, data was published showing Indonesia’s GDP growth in 2014 was 5.0% year-on-year. Although this marks the slowest pace since the global financial crisis lows, the news that private consumption contributed a robust 56% to total GDP growth was encouraging. In our opinion, Indonesia is at a turning point, with the recently elected government allocating a significant part of its budget to developing infrastructure. Indonesia will, in our view, see an increasing part of its growth coming from fixed assets investment. We expect 2015 GDP growth to be in 5.4%-5.6%. Investors should consider the case for Indonesia since we believe that a positive wind of change and corporate earnings growth is on its way.
GDP growth hit the bottom in 2014
Indonesia’s 2014 GDP growth printed at 5.0%, marking a still-decelerating trend though remaining higher than the previous lows during the global financial crisis.
YoY(%) quarterly GDP growth, and outlook for 2015
Source: Bloomberg, 5 February 2015
Fourth-quarter 2014 GDP growth came in at 5.01%. Private consumption growth slowed marginally from 5.1% in third quarter 2014 to 5.0% YoY, while investment growth rose from 3.9% to 4.3%. The contribution to GDP from government consumption remains low in value, at about 7%, but improved strongly in the fourth quarter from the previous quarter to 2.8% YoY from 1.3%.
We expect the fourth-quarter growth rate to have been the slowest for Indonesian GDP growth. Since President Joko Widodo came to power last November, he announced – and has already implemented – serious reforms. Fuel subsidies were cut and a fixed price was set, which should improve the country’s fiscal and trade deficits. Investors were concerned about the ability of the new government to pass reforms, but the budget approval process has so far gone remarkably smoothly.
Infrastructure investment to support growth
Following the cut in fuel subsidies and budget approval, it is likely that an additional USD 54 billion will be allocated from the budget for infrastructure development; this means that by 2016 the infrastructure budget will have doubled from 2014 levels.
Infrastructure budget skyrocketing
The re-allocation of the budget, combined with increasing foreign direct investments, reductions in red-tape and other reforms, means the overall investment momentum should increase. We believe the GDP growth rate will rebound as a result, and if strong enough, we could see a rebalancing of the economy more toward investment.
Positive environment for solid earnings growth
In our opinion the consensus on earnings growth is conservative. Indonesia’s corporate earnings could be entering a positive revision cycle after nearly three years of downward revisions.
We expect earnings to rebound faster than the GDP growth rate, to high double-digit levels from the second quarter 2015, particularly for well-managed companies in sectors such as infrastructure, construction, real estate and utilities. Taking this into account, Indonesian companies are priced at 1.3 PEG* for the next 12 months, which is lower than their peers in Asia Pacific ex-Japan countries and in ASEAN.