Economics Markets Strategy - the DBS Vickers Securities Equities ...

More documents

Recommendations

Info

Economics: Indonesia Economics – Markets – Strategy ID: Fingers crossed • The government’s decision to raise subsidized fuel prices despite looming elections bodes well. It is another step towards long-term fiscal sustainability, following the fuel price hike of 2005 • But larger price adjustments will have to be made in the coming months. Even doubling the price of subsidized fuel prices is likely to leave the subsidy:GDP ratio above the government’s threshold of 3% • Until further policy action is taken, the rupiah and other Indonesian market prices could remain under pressure. The May fuel hike will slow growth to 6.0% this year. It will also add to already-high inflation; this year headline CPI will rise to 10.3%, before cooling to 7.2% next year. Such would provide cause for Bank Indonesia (BI) to lift its (new) overnight benchmark interest rate by a further 75bps to 9.25% by end-3Q08 • Further fuel price adjustments would mean downward revisions to our growth forecasts, and higher inflation and interest rate projections. Nonetheless subsidy cuts should be interpreted as a positive for the country’s fiscal balance and macro fundamentals and should boost foreign sentiment toward the country INDONESIA Subsidized fuel prices were lifted 28.7% in late May Subsidized fuel prices lifted nearly 30% in May On May 24, the Indonesian government announced for the first time in almost three years that it would raise the price of subsidized fuel. Prices of fuels used by households and consumers were upped by an average of 28.7% (fuel for industrial use is not subsidized), with premium fuel 33% more expensive at IDR 6,000/ltr, diesel lifted by 28% to IDR 5,500/ltr and kerosene by 25% to IDR 2,500/ ltr. The hike in subsidized prices had been flagged for some months, and given the pressure of higher oil prices on the country’s budget deficit – crude had touched a new high of above USD 135/bbl just two days prior – an adjustment in subsidized prices was inevitable. With the country importing significantly more refined oil than what it exports in crude oil (almost 60 times more in 2007, to be exact – Chart 1), the rise in oil prices had made subsiding fuel prices at home increasingly untenable. For example, our estimates indicate that for every liter of IDR 4,500 subsidized premium fuel enjoyed by Indonesians, the government was shouldering a subsidy burden almost twice that, by buying refined oil at world prices and selling the same at home at subsidized levels (Chart 2). Had fuel prices not been adjusted, our calculations suggest that this year’s budget deficit would have come close to 2.2% of GDP, a seven-year high. More significantly, the fuel subsidy would have amounted to some 3.3% of GDP – the highest since 2005, and busting the administration’s unwritten rule that the subsidy:GDP ratio not exceed 3%. But much more needs to be done So, kudos to the government for making the politically tough decision to lift subsidized fuel prices - in contrast to the circumstances surrounding the (much Lim Su Sian • (65) 6878 1740 • limsusian@dbs.com 100
Economics – Markets – Strategy Economics: Indonesia Chart 1: Indonesia's net oil & gas position USD mn 15000 10000 5000 Chart 2: 'Market' versus subsidized premium px IDR/ltr 14000 12000 10000 8000 Latest: Apr08 Oct05 subsidy cut subsidy burden 0 -5000 -10000 -15000 Gas Refined oil Crude oil Oil & gas net exports 1998 2000 2002 2004 2006 6000 4000 2000 0 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Theoretical 'mkt' px (based on Nymex) Premium fuel larger) fuel price hike of Oct 2005, President Yudhoyono is not fresh from winning a landslide victory at the polls, but is instead heading into another election in June 2009. The fuel price hike also came on top of rising food inflation – in April fresh food prices were up almost 16% YoY, and around 9% for processed food. In 2005, food prices had averaged around 7% YoY prior to the fuel price hike. But we don’t think the government’s work is finished yet, and the real political test could come in the months ahead. Following the May fuel price hike, government officials expect this year’s budget deficit to be contained between 1.8-2.0% of nominal GDP. According to our estimates*, this is entirely achievable – but only if for the remainder of the year crude oil averages USD 115/bbl or less (around USD 110/bbl for the full year), or if the rupiah does not weaken beyond 9,550 to the dollar (9,4000 per dollar for the full year) (Table 1). (In the year to date Nymex has averaged USD 107/bbl, while USD/IDR has averaged around 9,250.) Deficit:GDP ratio will be contained at 1.8-2.0% - only if crude averages USD 115/bbl or less in 2H08 If the subsidy:GDP ratio – and not the deficit:GDP ratio – is actually the more important, then crude oil must average even lower. According to government officials we spoke with earlier this year, there is an unwritten government mandate Table 1: Deficit scenarios after May fuel price hike (def % of GDP) 2008 USD/IDR Nymex 1mth 9100 9200 9300 9400 9500 95 1.5 1.5 1.6 1.6 1.6 100 1.7 1.7 1.7 1.8 1.8 105 1.8 1.8 1.9 1.9 2.0 110 2.0 2.0 2.0 2.1 2.1 115 2.1 2.2 2.2 2.3 2.3 120 2.3 2.3 2.4 2.4 2.5 125 2.5 2.5 2.5 2.6 2.6 130 2.6 2.7 2.7 2.8 2.8 135 2.8 2.8 2.9 2.9 3.0 that the subsidy:GDP ratio not rise above 3%. Indeed, this appeared to be a trigger point for government policy action three years back – if not for the steep 126% hike in subsidized fuel prices in October 2005, the subsidy:GDP ratio would have been much higher than the reported 3.4% for the year (Chart 3). Going by that rule, then crude would need to averaged below USD 103/bbl for the second half (or USD 105/bbl for the full-year), if USD/IDR remains within the 8,950-9,550 range (Table 2). 101
Page 1 and 2:
Economics Markets Strategy 3Q 2008
Page 3 and 4:
Economics - Markets - Strategy June
Page 5 and 6:
Economics - Markets - Strategy June
Page 7 and 8:
Economics - Markets - Strategy Econ
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Economics - Markets - Strategy Curr
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Economics - Markets - Strategy Yiel
Page 47 and 48:
Page 49 and 50:
Page 51 and 52: Economics - Markets - Strategy Yiel
Page 59 and 60: Economics - Markets - Strategy Asia
Page 73 and 74: Economics - Markets - Strategy Econ
Page 101: Economics - Markets - Strategy Econ
Page 153 and 154:
Page 155:
Economics - Markets - Strategy 3Q 2
show all

Economics Markets Strategy - the DBS Vickers Securities Equities ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?