Monday, October 27, 2014

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Don’t Give Up on Indonesia

Indonesia: Jokowi’s New Cabinet – Good, But Not Spectacular?


Indonesia‘s new president Joko Widodo, or Jokowi, formed a new cabinet on Sunday.
The reaction from analysts seem overall positive (see the linked Bloomberg article). The new finance minister, Bambang Brodjonegoro, is a well-respected economist.
Barclays‘s Wai Ho Leong and Wai Ho Leong loved the line-up:
Most of the five key economic posts (finance, economics, energy, trade and state owned enterprises) went to technocrats. The 29 remaining posts went to a roughly even mix of 14 political allies and 15 technocrats.
we think the appointment of vice finance minister Bambang Brojonegoro’s as finance minister will be seen as a positive for policy continuity. At 48, Bambang is one of the youngest permanent secretaries (or vice ministers) in the Indonesian civil service and well regarded as an economist. He is international in his outlook, having managed the Fiscal Policy Office and Debt Management Office – two portfolios in the finance ministry which entail frequent interactions with professional investors.
The developments also support our forecast of two fuel price hikes over the next 12 month. We expect an adjustment of at least IDR1,500/litre with effect from 1 November, followed by a similar adjustment in H2 next year.
But Nomura Securities, a long-time bear towards the fresh-faced Jokowi, continued to voice its reservations, despite some grudging nod to Jokowi. Here is analyst Alastair Newton and team:
The economics team is missing several names that investors and the business community had hoped to see included, most notably former finance ministers Sri Mulyani Indrawati, Agus Martowardojo and Chatib Basri. The new finance minister Bambang Brodjonegoro may be known by market participants by virtue of his previous role as a deputy at the ministry, but we think he is unlikely to be of the same calibre as his predecessors, and is untested in dealing with Parliament regarding budget decisions.
We also see on the list a number of close allies and associates of PDI-P‟s founder and leader, Megawati Sukarnoputra, most notably her daughter, Puan Maharani. There was probably a certain degree of inevitability about this; but contrast this with Narendra Modi in India, a non-insider. By winning big in the general election, Mr Modi has managed to keep his party‟s ‘insiders’ in check; however, PDI-P‟s disappointing showing in the legislature elections may, we believe, result in Jokowi continuing to be dogged by internal party politicking.
Ultimately, for Indonesia, it is whether and when the government cuts fuel subsidies. It took India’s Modi six months to get to that. Give Jokowi a chance to prove himself, I would argue. See my October 13 column “Don’t Give Up on Indonesia” on why fuel subsidy cut is the number one thing Jokowi must tackle.
The financial market reacted negatively to the news today. The Indonesia Southeast Composite Index fell 0.8%. Month-to-date, the iShares MSCI Indonesia ETF (EIDO) gained 1.7%.

Its reformist new president has powers he can use to circumvent an opposition parliament. Investors should keep an eye on energy policies.

Oct. 11, 2014 1:56 a.m. ET
On Oct. 20, Indonesia will inaugurate a new president, Joko Widodo. Commonly referred to as Jokowi, the former governor of Jakarta is a young political outsider with a reputation for good governance. But market sentiment has begun to sour on Indonesia after his election prompted a hostile parliamentary attempt at undermining his power. Last week, Credit Suisse downgraded Indonesia to Sell, saying, “The outlook for the formation of a parliamentary coalition remains uncertain.” 

But Jokowi deserves a chance to prove himself, both to Indonesian citizens and investors. He can do a lot without parliament. A key development to watch is whether he cuts Indonesia’s fuel subsidies, a move he can make on his own. 

What Jokowi inherits next week is an economy accustomed to growing 6% to 6.5% that has slowed to 5%, a vigilant central bank wary of rising U.S. interest rates, and limited fiscal power. The opposition coalition, led by defeated presidential candidate Prabowo Subianto, a general and son-in-law of former dictator Suharto, holds 52% of the seats in parliament. The Jokowi coalition has only 36%. Jokowi also “shouldn’t expect any favors from the central bank,” which held its benchmark rate at a relatively high 7.5% last week, says Gareth Leather of London-based research firm Capital Economics.
Prabowo has made his opposition clear. In a setback for Indonesia’s young democracy, the parliament recently passed a law abolishing direct local elections; instead, Indonesia’s governors and mayors would be appointed by regional assemblies, mostly controlled by Prabowo’s coalition. The new law, not yet enacted and under review by the country’s Constitutional Court, has sent the iShares MSCI Indonesia ETF (ticker: EIDO) down 7.5% in two weeks.

Jokowi can show independence by boosting fuel prices. Half of Indonesia is powered by coal—which is cheaper than oil—compared with three-quarters for China and India. Indonesia has a large coal reserve, yet runs a current-account deficit from oil imports. The incumbent government failed to act, wary of local oil interests and voter fallout. 

A HIKE IN FUEL PRICES IS WIDELY SEEN as a game changer. The government spends about $30 billion per year, 17% of its budget, on energy subsidies (mostly in fuel), but only $16 billion on capital projects. As long as Jokowi cuts fuel subsidies to finance infrastructure, he doesn’t need to go to parliament to ask for money, notes Sarina Lesmina at Asian brokerage CLSA.
India’s new shareholder-friendly Prime Minister Narendra Modi has talked up “made in India.” Indonesia should do the same for its manufacturing, says Leather, since it can deliver 7% annual growth, even if other sectors slow. To kick-start manufacturing, Jokowi must build roads. Goods in Indonesia take longer to reach their destinations than anywhere else in Asia, according to the World Bank’s Logistical Performance Index. So raising fuel prices has the dual benefit of improving Indonesia’s current account and its business environment.
CLSA believes recent market declines open buying opportunities in related areas. Among them: cement maker PT Indocement Tunggal Prakarsa Tbk (INTP.Indonesia), coal miner PT Tambang Batubara Bukit Asam (PTBA.Indonesia), and two banks, PT Bank Rakyat Indonesia (BBRI.Indonesia) and PT Bank Negara Indonesia (BBNI.Indonesia).



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