Indonesia: signs of economic recovery are flashing

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Please note that this article may contain technical language. For this reason, it is not recommended to readers without professional investment experience.

On the dashboard of indicators for Indonesia, the signs of economic recovery are flashing green now that President Jokowi’s reshuffled government has introduced the first batch of five stimulus packages. Investors are feeling encouraged that the challenges the country faces are being met, for instance by accelerating infrastructure development. The recent strengthening of the Indonesian rupiah has also supported investor sentiment (see Exhibit 1 below). As a result, the International Monetary Fund (IMF) recently upgraded its estimate of GDP growth in 2016 to 5.1%, close to our forecast of 5.2%. We believe that for Indonesian equities, there is now an attractive entry point for long-term investors looking for upside opportunities.


Exhibit 1: The Indonesian rupiah rallied versus the US dollar in early October 2015 (graph shows rupiah per US dollar for the period from May 2014 to 9 November 15)


Source: Bloomberg, BNP Paribas Asset Management, as of 9 November 2015


Stimulus packages for recovery – thumbs up

Since September, the government has announced deregulation and stimulus plans to revive domestic purchasing power, encourage private investment and bolster the rupiah (see Exhibit 2 below).

Exhibit 2: Five deregulation and stimulus packages


Source: Bloomberg, BNP Paribas Asset Management, as of October 2015
(REITS – Real Estate Investment Trust)

In our view, these moves represent serious support for the economy and should help encourage capital inflows over the medium and long term.

Accelerated infrastructure spending

The pace of government spending is expected to accelerate and should amount to at least 90% of the 2015 budget, which should in turn grease the Indonesian economy’s wheels in the long run. The 2016 budget plays to this, including as it does the aim to make public investment in infrastructure a higher priority. Already, the ministry for public works has started tendering projects for 2016 to ensure that budget disbursement and project construction starts earlier than usual.

Three main reasons favouring a gradual economic recovery

First, we think GDP growth could accelerate in Q4 2015 to reach 5.2% by 2016, supported by government spending (see Exhibit 3 below).

Exhibit 3: Quarterly GDP from 2010 to 2016e (in %)


Source: Bloomberg, BNP Paribas Asset Management, as of October 2015

Secondly, private consumer spending, which represents 60% of GDP, could regain momentum over the rest of 2015 amid currency stability. Since early October, the rupiah has appreciated on the back of a stabilising oil price, the delay in US monetary policy tightening and intervention by Bank Indonesia. We note that rupiah strength is one of the most important factors underpinning the improvement in investor sentiment on Indonesia equities.

Last but not least, the smaller current account deficit is encouraging. This can be attributed to the trade surplus and the effects of this year’s fuel subsidy cut. We believe this should help shelter the economy from some of the adverse effects of an eventual hike in US interest rates.

Less inflation allows for earlier-than-expected rate cut

In September, inflation eased to 6.8% year-on-year from 7.2% YoY in August amid lower food and transportation prices. We expect inflation to drop further, to around 4%, underscoring the central bank’s assessment of inflationary pressures having become less intense. Together with the recent gains in the rupiah, greater macroeconomic stability has created the leeway for an earlier-than-expected policy rate cut. We believe the start of a monetary easing cycle for 2016 would be crucial to a revival in consumption and thus economic growth.

Attractive equity valuations: a good point to buy

From our point of view, consensus estimates for company earnings growth remain conservative. As reforms accelerate, we expect earnings to improve gradually, clearing the way for earnings growth to pick up to 10%-13% by 2016 – particularly at well-managed companies in sectors such as infrastructure, construction, real estate and utilities.

Considering this expected solid growth, Indonesian equities look attractively priced at a price/earnings ratio (as of 30 September – Credit Suisse, IBES Estimates) of 11.8x for 2016, below that of peers in Asia Pacific and ASEAN countries. Meanwhile, at 17.4%, the estimated ROE (Return On Equity) for 2015 remains well above their peers’ average of 11.6%.

We are convinced that positive earnings momentum and the signs we see flashing for economic recovery for the coming months represent an opportunity for long-term investors.

Image: Jakarta, Indonesia
Aliyahdin Saugi

Head of Indonesian equities

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