Full year growth was at 5.07% which made Indonesia for the first time reached a trillion US dollar GDP. Food and Beverages, which had biggest proportion of consumption, stimulated higher consumption growth as it grew 5.37% YoY or the highest in 2017.
Annual inflation was dragged down to 3.25% due to high basis in January 2016. In line with our estimation, food inflation remained high in the beginning of 2018 with 2.34% MoM (2.95% YoY). Pertamina increased some fuel prices like Pertalite (Ron 90) by 1.3% to Rp7,600/liter and Pertamax (Ron 92) by 2.3% to Rp8,600/liter.
Bank Indonesia (BI) retained its policy rate at 4.25% in the beginning of 2018. BI decided to accelerate the implementation of new macroprudential policy after assessing weak domestic banking intermediation and procyclicality behavior.
BPS reported that Indonesia’s exports were down 3.45% MoM (6.93% YoY) in December, below our expectation and Bloomberg consensus (see table on the left). BPS reveals that aggregate price only grew 0.71% YoY and even decrease on monthly basis at -4.39% MoM. November imports data still had a strong annual growth at 17.83% YoY even though slightly decreased by 0.29% MoM.
Indonesia entered year end high season with a milder inflation in November. Food inflation was reported at 0.37% MoM (-0.49% YoY), much lower than previous year at 1.66% MoM (8.52% YoY). Low core inflation at 0.13% MoM (3.05% YoY) showed that domestic demand was still struggle to recover. November’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased by 0.39% MoM.
Palm oil remains the most traded vegetable oil in the world with only three countries to supply 75% of total world production, i.e. Indonesia, Malaysia and Argentina. The palm oil plantations in Indonesia has faced a long standing environmental and social issue and due to moratorium imposed by the Government since 2011, the annual growth of Indonesian palm oil output experiencing a downward trend.
Indonesian property remains attractive with influx of Foreign Direct Investment (FDI) in real estate sector increased by 22% YoY and reached USD2.04 bn in 9M17. The rise in real estate FDI outpaced the total FDI growth which only improved by 11% YoY to USD23.88 bn. Up to 9M17, the contribution of real estate FDI to total FDI up by 72 bps to 8.5% from similar period in 2016.
On October 25, 2017, Brent crude oil price rose to USD58.44/b (+2.85% YtD), while WTI price decreased to USD52.2/ton (-2.9% YtD), causing wider spread between the two benchmark prices, and indicating a sharp increase in U.S.
The Newcastle coal price was gradually down and bottomed at USD73.3/ton in mid-May’17. The Chinese Government’s decision to loosen the 276 working days ban has put a pressure on coal price.
The construction sector plunged about 20% Ytd, underperforming the JCI significantly by 32%. This was due to investor’s concern for 1) contractors funding constraints, 2) reduced visibility of new contract growth on perceived government budget limit and 3) government’s plan to limit contractor sourcing precast from subsidiary by 50%.
After seeing a 38% decline growth in 2015 to 6,068 units and a 8% growth in 2016 units to 6,554 units, Indonesia’s heavy equipment sales volume is back to double digit growth this year. As during 8M17, the nation’s sales heavy equipment sales expanded robustly by 62% to 7,091 units or already exceed full year 2016 sales.
Banks went through weak credit cycle from mid-2015 to 2017 on weak economy and rising non-performing loan (NPL). Many of the policy tone was very expansive to push the lackluster credit growth (i.e 200 bps rate cuts in 2016-2017, LTV relaxation in 2016, asset quality relaxation in 2015-2017); but elevated NPL and weak loandemand still hampered credit growth in 2016-2017.
Global economyis projected by IMF to expand by 3.6% in 2017 and 3.7% in 2018. Growth will be mainly driven by developing countries which are expected to grow 4.6% in 2017 and 4.9% in 2018. Developed countries growth is seen to strengthen at 2.2% rate in 2017 before it moderates to 2.0% in 2018.
JCI moved and closed below major resistance level of 6,082. Next resistance level is around the level of 6,130-6,160 which is resistance level of the mid-term uptrend channel. Support level at 5,970 is support level of the uptrend channel.
Indonesia’s exports grew 3.62% MoM (18.4% YoY) to USD15.1 bn in October, imports grew 11.04% MoM (23.33% YoY) to USD14.19 bn in October. Better global demand pushed Indonesia’s goods trade surplus higher to USD5.3 bn in 3Q17. Financial account (FA) recorded significant increase in surplus in 3Q17 to USD 10.4 bn which was driven by direct investment. BoP will remain in surplus for 4Q17 on the back of higher direct investment and easing CAD.
Statistics Office (BPS) data showed 3Q17 GDP growth had a mild increase at 5.06% YoY with quarterly growth came in at 3.18% QoQ (2Q17: 4.00% QoQ), which is below our estimation and Bloomberg consensus (see table on left). On the other hand, consumption still faced some challenges as it only grew 4.93% YoY (1H17: 4.94% YoY) which is actually in line with our expectation. Industry wise, GDP growth in 3Q17 was led by information and communication sector which grew 9.35% YoY in 3Q17. Indonesia’s February 2017 unemployment rate slightly eased to 5.50% from a year before at 5.61%. For 2018, we see that 5.3% is a realistic one, lower than government’s target at 5.4% as we see consumption will have gradual recovery.
BPS reported that October consumer price index only slightly increased by 0.01% MoM and edged down to 3.58% YoY, lower than our estimate, Bloomberg consensus (see table on the left) and central bank’s estimation (0.09% MoM). BPS noted that food price continued its deflationary trend in October of -0.45% MoM (0.80% YoY) due to onion and garlic harvest season in previous two months. October’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased 0.45% MoM. Inflation will still be manageable for the remaining of 2017.
Top picks underperformed the JCI in June, weighed down by AISA and MEDC, Foreign investors net sellers in June, but still hold solid position in Indonesia market, A strong start in July and Remain positive on Indonesia equity market .
Same inflation level as previous year’s Lebaran, Significant pressure from transportation and electricity sectors, Taming food prices a success story and Retain year-end inflation forecast at 4.0% YoY .
17 companies out of 73 companies under our coverage universe have released their FY16 results by end of February. 36% of companies beat estimates, 24% fell short and the rest 40% were in line (counted as companies reporting net income within +/-5% of our estimates). We saw some of the major non-operational items affected the accuracy of our forecast that were mainly attributable to the: (i) big tax benefit by SMGR, ii) the absence of impairment loss by UNTR, iii) higher tax rate of 63% by INCO and iv) a significant turnaround into forex gain by AALI and JPFA.
National cigarettes sales volume growth reached its slowest pace in 2015 where sales volume in 2015 was on the same level as in 2014. However, sales volume has started to grow in 2016 where as of 1H16 sales volume grew by 0.3% in 1H16. On QoQ basis in 2Q16, sales volume accelerated by 13.4% QoQ and 6.4% YoY. We can somewhat attribute the volume rebound to better economic growth in 2016 in the mid of lower inflation (thus better purchasing power) and reasonable excise tax increase in 2016 by 11.2% (about the same level as nominal GDP growth). In 2017, we expect cigarettes sales volume growth to rebound by 2% with better purchasing power.
High grade coal (coking coal) demand will continue to outpace supply in 2017, ending two years of oversupply condition. Demand from China, India and Japan steel markets remains buoyant, but supply is expected to decrease due to China’s coal production cut since mid-2016, creating a global coking coal deficit. Global coking coal price starts to rally to USD130/Mt in June 2016 and remains above USD160/Mt since September.
We see Indonesia GDP growth accelerating from 5.1% in 2016F to 5.3% in 2017F driven mainly by higher consumption. We believe low inflation and interest rate environment coupled with rising commodity prices should help boost purchasing power and enable a further consumption recovery. 2Q16 saw private consumption improve to 5.04% after registering sub-5% growth since 2Q15. We also expect higher investment driven by a robust consumption growth outlook, better political stability, recovery in exports, and likely further sovereign credit rating upgrades on more realistic budget which can improve the policy to be more effective and predictable.
In June 2016, loans of banking industry grew by 8.8% YoY while deposit only grew by 3.6% YoY during the same period, both were considerably slower than at the end of 2015. The slowing down of loans and deposit growth is a structural trend that has begun since 2011. Nevertheless, a trend must stop somewhere and we expect that loans growth could start to accelerate in 2017 on the back of higher economic growth and central’s bank consistent expansive monetary policy. BI expects industry loans to grow by 11% YoY in 2017, and we also believe that loans to grow by 11.0% YoY in 2017.
As recent damaging El Nino phenomenon has come to an end, we expect both palm oil production in Indonesia and Malaysia to gradually recover towards the end of this year before entering low-crop season in 1H16. We might see Indonesia’s palm oil output to increase to 33 mn ton next year, modestly higher compared to this year’s expectation of 31 mn ton as crop resumes its yearly growth momentum.