Still headroom for growth in Indonesia

Shortly after the release of its first-quarter (1Q) gross domestic product (GDP) figure of 5.01% growth year-on-year, Indonesia saw its long-term sovereign credit rating raised by Standard and Poor’s (S&P) from BB+ to BBB-.

The S&P upgrade of the country to investment grade has helped its equity market sustain its uptrend that has been driven by government reforms and its monetary and currency exchange measures.

With the full investment grade rank, we foresee more foreign direct investments (FDIs) flowing into Indonesia as historically, rating upgrades attract foreign investments into an economy.

India, for instance, witnessed foreign inflows into its equity and government bond markets after it achieved full investment grade rank in 2011.

Should that happen to Indonesia government bond segment, we foresee a spill-over into the corporate bond segments as well, driving down yields and bringing down the overall financing cost for businesses.

This will in turn cultivate a decent business environment and improve earnings for corporate Indonesia. FDIs will likely reduce the fiscal burden of infrastructure and urbanisation spending pressure on the government.

Indonesia’s 1Q GDP figure was however below consensus estimate of 5.1%. In expenditure terms, domestic consumption remains a dominant growth driver, though mode-rated slightly amid heightened political tensions during the Jakarta gubernatorial election in April.

The moderation in domestic spending was offset by higher growth contribution from government consumption.

Exports grew on the back of higher oil price and stronger global aggregate demand, particularly for rubber-related products as well as mineral fuel and animal oils. Sector wise, manufacturing and agriculture lifted economic growth, as the country saw increased external demand for manufactured goods while agriculture benefitted from a better weather condition post El Nino.

Following the end of guber-natorial election, we expect political tensions to ease as the calendar drifts towards the second-half of 2017.

Spending and investment appetite on the domestic front are expected to ameliorate, underpinned by moderate inflation and better consumer confidence.

The rollout of various infrastructure projects and developments will help propel Indonesia’s economy going forward.

After having posted months of strong double-digit exports and imports growth rates, we expect growth figures to moderate in the months ahead as the low-base effect from oil price subsides.

External demand for manufactured and processed materials should continue to support external trade.

The Jakarta gubernatorial election led to growing concerns over the increasing influence of religion on the political landscape of Indonesia.

We believe the change in governor is unlikely to stall the ongoing reforms by the Indonesian government.

We raised the fair price earnings (PE) ratio of Indonesia’s equity market from 14 times to 16 times back in December 2016. Since then, the Indonesian equity market, as represented by JCI Index, has climbed by

7.2% in ringgit terms with its PE valuations trading slightly over its fair level.

Analysts are generally positive on the earnings prospects of the listed companies in Indonesia. Year-to-date (YTD), earnings for the JCI Index has been revised upwards by 2.4% and 3.8% for 2017 and 2018 respectively.

The recent upgrade by S&P has affirmed the economic strength of the most populated nation in Asean.

The infrastructure spending and domestic consumption will continue to support growth of the Indonesian economy.

Structural reforms will lead Indonesia towards a more mature growth phase gradually over the long run and foreign investments inflows will resume as the macro framework of the economy fortifies.

The government’s fiscal consolidation efforts will also put Indonesia in a more resilient position, making it less prone to external vulnerabilities.

Though the market has surged quite a fair bit on a YTD basis, the nation’s valuation remains fair, and given the aforementioned reasons, we opined there’s still headroom for growth on the Indonesia’s equity front.