Strategy:
Smoother Homecoming
Smoother Homecoming
The market continues
to test record highs, on the expectation of a stronger economy in 2H. In the
same vein, the Government continues to deliver scores of progress. This was
seen recently during the important Lebaran period, with the manageable
inflation and smoother homecoming on infrastructure improvement. We expect
inflation to normalised post festive season, and the central bank is unlikely
to make changes to its interest rate policy. Further spending on infrastructure
in 2H would benefit the construction, with PTPP as our Top Conviction BUY in
this space.
¨ Palpable impact from
infrastructure development. A look at the massive scale of infrastructure
development since 2015 indicates the Government’s many achievements. The
biggest homecoming tradition is during Lebaran. It is seen as the litmus test
for the current strength of Indonesia’s infrastructure, with millions of people
travelling together in a short window of time. During last year’s holidays, the
main talking point was the severe traffic jams at Central Java’s toll road
exits, which even claimed 12 lives. This year, fatalities were avoided as functional
and alternative toll roads began operations. Four new north-south flyovers in
Central Java helped considerably with the congestion. The number of fatalities
during the holidays fell by 40% vs last year, the Ministry of Transportation
recently announced.
Infrastructure
related to other means of transportation also showed signs of improvement, as
the number of people using trains and airplanes increased by 6% and 13%
respectively from last year’s Lebaran holidays. Overall, we witnessed a
palpable improvement. There is still much room for improvement, though. In
2018, infrastructure remains a top priority, as seen in the recent additions to
the strategic project acceleration list to 248 projects from 225 previously. We
maintain our positive view on the construction counters, with PTPP as our top
conviction BUY.
¨ Inflation under
control.
While the higher inflation in June of 4.4% was well expected due to the festive
season, the uptick is below our 4.7% expectation. In July, there is likely to
be inflationary pressure on educational items due to the back to school season.
However, we anticipate for an overall lower trend of inflation toward year end.
We are encouraged by the Government’s commitment to rein in inflation, as seen
in the lower core Consumer Price Index (CPI) figure and only a modest increase
in volatile food prices. Through the implementation of cross-government
ministry and monetary authority policies, synchronised action to extensively
control food price occurred from upstream to downstream. Even during the
festive season, food prices were down 2.2% YoY in June. We expect inflation to
normalise toward 4.2% toward year end and, on that basis, we also foresee no
change in the central bank’s interest rate policy this year.
¨ Poised for more
growth in 2H.
We expect economic seasonality to normalise this year, whereby growth would be
more apparent in 2H17. Unlike in 2016, where the economic slowdown in 2H was
partly driven by budget cuts, we expect the Government not to make any
significant change to its spending allocation, especially on infrastructure. We
expect the economy to grow by 5.3% YoY in 2H17, faster than the 5.1% estimated
for 1H. This is underpinned by a rebound in government spending, as revenue
collection improves and state budget disbursements for infrastructure projects
accelerate. We assume that the Government may be compelled to record a higher
budget deficit in 2017 and would not opt to reduce its budget as in 2016. We
expect the budget deficit to rise to 2.6%, ie higher than the Government’s
target of 2.4%.
Kindly click the following link for the full report: Indonesia Strategy: Smoother Homecoming
Best regards,
Helmy Kristanto
Director
Head of Indonesia
Research
PT RHB Sekuritas
Indonesia
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