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Economics: Indonesia Economics – Markets – Strategy Imports will rise at an even faster 14.4%, eating into the trade surplus. Import growth has also been stronger than expected this year, up 16.8% YoY in 1Q08 and reflecting strong domestic demand for raw materials and capital goods. In the quarters ahead, though, we expect this to slow, mirroring the likely moderation in investment growth. Further fuel price adjustments should be interpreted as a longer-term positive Further fuel price hikes… or not Should oil prices continue to stay elevated, investors will want to see the government make further adjustments to subsidized fuel prices. This could be done in one big step (unlikely if before next year’s elections), or several small steps. To buy itself some time until it is ready to significantly adjust price levels (till, say, after the elections), it could even index subsidized fuel prices to global levels, rather than keep prices of subsidized fuels at fixed levels. Such would keep the absolute amount of the subsidy burden steady, and in turn contain deficit ratios within acceptable limits. Naturally, following further fuel price adjustments our growth forecasts will have to be trimmed, while our inflation and interest rate forecasts will have to be raised. These changes will depend on the magnitude and timing of the subsidy cuts. Still, any fuel price adjustments should be interpreted as a positive – every fuel subsidy cut brings the country one step closer towards the elimination of subsidies altogether, which will remove significant stress and uncertainty on the country’s finances, and will also result in resources being allocated much more efficiently. The risk in the coming months is a delayed - or worse, absent - government response amid a continued rise in oil prices. Such would intensify investor concerns over the budget deficit, putting the rupiah at risk of further weakness. Probably not quite as weak as the 10,400 level against the USD as we saw in 2005, given that the level of foreign reserves have almost doubled since. But weak enough to push BI into defending the currency via more aggressive rate hikes than we have currently factored in. Notes * For details on our methodology, please refer to our focus note, “Indonesia: Oil and the budget - discomfort levels”, November 21, 2007 106
Economics – Markets – Strategy Economics: Indonesia Indonesia Economic Indicators 2007f 2008f 2009f 1Q08 2Q08f 3Q08f 4Q08f 1Q09f 2Q09f Output and Demand Real GDP growth 6.3 6.0 6.3 6.3 6.3 5.8 5.6 6.1 6.3 Private consumption 5.0 5.0 5.3 5.5 5.4 4.6 4.4 4.9 5.2 Government consumption 3.9 6.1 6.8 3.6 7.5 8.0 5.0 11.0 8.0 Gross fixed capital formation 9.2 11.0 9.4 13.3 12.3 10.2 8.7 9.0 9.5 Net exports (IDRtrn, 00P) 181.5 184.3 190.8 52.9 48.3 37.3 45.9 54.0 47.7 Exports 8.0 11.9 8.2 15.0 12.4 10.2 10.3 8.4 7.8 Imports 8.9 14.4 9.2 16.8 15.3 14.1 11.8 10.0 9.8 External Merch exports (USDbn) 114 144 164 34 37 36 38 40 41 - % chg 13 26 14 31 30 23 22 18 13 Merch imports (USDbn) 74 103 118 23 27 26 26 28 31 - % chg 22 38 15 50 50 30 25 21 15 Merch trade balance (USD bn) 40 42 46 10 10 10 12 12 10 Current account bal (USD bn) 11.8 13.3 14.5 3.8 3.5 2.8 3.2 4.0 3.5 % of GDP 2.7 2.7 2.7 n.a. n.a. n.a. n.a. n.a. n.a. Foreign reserves (USD bn, eop) 57 60 66 n.a. n.a. n.a. n.a. n.a. n.a. Inflation CPI inflation 6.4 10.3 7.2 7.5 10.3 11.7 11.4 9.7 7.5 Other Nominal GDP (USDbn) 433 484 546 n.a. n.a. n.a. n.a. n.a. n.a. Budget deficit (% of GDP) -1.5 -2.3 -2.5 n.a. n.a. n.a. n.a. n.a. n.a. Total external debt (USD bn) 137 143 146 n.a. n.a. n.a. n.a. n.a. n.a. % of GDP 32 30 27 n.a. n.a. n.a. n.a. n.a. n.a. * % change, year-on-year, unless otherwise specified ID – nominal exchange rate IDR per USD 9,580 9,440 9,300 9,160 9,020 8,880 8,740 6/11/2007 10/10/2007 2/8/2008 6/10/2008 ID – policy rate %, 1 mth SBI rate 19.0 17.0 15.0 13.0 11.0 9.0 7.0 Jan-01 Nov-02 Sep-04 Jul-06 May-08 Sources for charts and tables are CEIC, Bloomberg and DBS Research (forecasts and data transformations) 107
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