The rupiah was the worst performer among the five Asean currencies last year. On the surface, this runs counter to Indonesia seeing increased trade and current account surpluses (on higher commodity prices and a net inflow of equity investments). We believe the relative weakness at least partially came from foreign investors selling Indonesian government bonds, suggesting a correlation between the two.
We believe the rupiah will likely stay around the current level towards end-2009F, due to two off-setting forces — depreciating pressure from the sale of Indonesian
government bonds, and appreciating pressure from larger current account surpluses, though volatility could be high, due to capital flows being affected by sub-prime issues.
Exhibit 132. Foreign purchases, forex reserves and the rupiah
(5) (4) (3) (2) (1) 0 1 2 3 4 5
06 07
8,400 8,600
8,800
9,000 9,200
9,400
9,600 Foreigners' purchases of equity (LHS)
Foreigners' purchases of government bonds (LHS) Change in forex reserves (LHS)
Rupiah exchange rate (RHS)
(US$bn) (Rp:US$1)
Source: Nomura International (Hong Kong) Limited, CEIC data
We believe the rupiah will likely stay around the current level towards end-2009F
Economics | Indonesia Tomo Kinoshita
Our view now, versus three months ago
We have cut our real GDP growth forecast for 2008F to 6.2%, from 6.4%, based on lower US growth assumptions. On the higher minimum wages, we are more confident that Indonesia’s private consumption will show robust growth in 2008F.
Summary
Indonesia’s economy accelerated moderately in 3Q07, on the back of strength in domestic demand. We believe the economy can maintain this robust growth, owing to strong investment, expanding private consumption, and an accommodative fiscal stance. The increase in minimum wages, alongside higher salaries for government employees, should boost private consumption in 2008F. On the monetary policy front, we expect no change in the policy interest rate, due to steep inflation. We think the rupiah will likely stay around the current level towards end-2009F due to the balance between depreciating pressure from the sale of Indonesian government bonds and appreciating pressure from larger current account surpluses, though we note volatility could be high.
Real economy developments and directions
Real GDP growth rose to 6.5% y-y in 3Q07, from 6.3% y-y in 2Q07. Domestic demand, particularly private consumption, fixed capital formation and government consumption, was strong. We expect the strength in domestic demand will be maintained for the next few quarters, with private consumption in particular staying robust. Lower interest rates, more aggressive lending by financial institutions and rising stock prices saw
automobile sales rise by 36.5% y-y in 4Q07. Consumer sentiment remained high in December. The strength should see support from the increases in minimum wages — while the increases differ across regions, the rise is 8.0% in Jakarta, and 10%-plus in more than half of the provinces in Indonesia.
Steep investment growth should be sustained, on increased natural-resource-related investments and the government’s infrastructure spending. Approved FDI totalled US$37.6bn for the first 11 months of 2007, which was up 2.7x y-y. Most of these approved investments are likely to be implemented over 2008-09F, supporting growth.
On the external front, non-oil & gas export growth was still over 10% in November 2007. Since the price of natural resources produced in Indonesia should remain firm in the near term, we believe exports will continue to provide support to the economy.
While we remain optimistic on the growth prospects for the Indonesian economy, we lower our real GDP forecast for 2008F to 6.2%, from 6.4%, on weaker US growth assumptions. Our 2009F growth forecast remains 5.5%.
Fiscal policy
Indonesia is taking an aggressive fiscal policy stance under the current administration.
The central government’s capital spending is set to rise by around 50% y-y in 2008F.
The government is not only aggressive in implementing infrastructure projects, but also increasing spending to mitigate poverty. While maintaining those programmes such as providing rice directly to the poor, it plans to disburse more for the National Community Empowerment Programme in 2008F, under which the central government provides funds directly to the 3,800 districts to mitigate poverty.
On the other hand, there is concern that rising oil prices will hurt the government’s fiscal position. The central government subsidises domestic retail prices for gasoline and kerosene, and while it raised prices dramatically in 2005, they remain well below international levels. While the central government receives higher oil-related revenues when oil prices rise, part of the revenue must be disbursed to local governments by law. This means the central government’s fiscal position actually worsens when oil prices rise. If oil prices remain flat, we expect retail prices to remain unchanged, though much higher international oil prices could pressure retail levels.
Economy set to expand strongly, supported by investment, private consumption, fiscal and monetary policies, and rising natural resource-based exports
Real GDP growth rose to 6.5% y-y in 3Q07
Rising oil prices hurt the fiscal position
Economics | Indonesia Tomo Kinoshita
Monetary policy and interest rates
Having cut the benchmark interest rate to 8.0%, there is limited room for Bank
Indonesia (BI) to reduce the policy rate further. If the CPI rate falls to the government’s target levels of 5%±1% for 2008F and 4.5%±1% for 2009F, the policy rate could be reduced further. But with inflationary pressure unlikely to ease any time soon, we expect the government to keep the BI rate at 8.0% until end-2009F, unless the economy shows substantial risk of a slowdown.
Forex policy and outlook
We believe the rupiah will stay around the current level towards end-2009F, given two off-setting forces — depreciating pressure from Indonesian government bond sales, and appreciating pressure from larger current account surpluses, though volatility could be high, due to capital flows being affected by the sub-prime issues. Our exchange rate forecasts are maintained at Rp9,350:US$1 for end-2008F and Rp9,400:US$1 for end-2009F.
Risks
Our view on downside risks is unchanged. Sluggish external demand could still dampen the local economy. Higher oil prices would affect the central government’s fiscal position. However, since the country has low dependence on exports, the downside risk is limited compared with much of Asia. In fact, Indonesia’s export-to-GDP ratio for 2006 was 27.7%, lower than that of most of the Asian economies on our radar screen, bar India. Terrorism and avian flu remain risks to the economy.
We expect no change in the benchmark interest rate toward end-2009F
Relatively lower risk due to low dependence on exports
Economics | Indonesia Tomo Kinoshita
Indonesia charts — 1
Exhibit 133. Real GDP contribution Exhibit 134. Foreign trade
(15) (10) (5) 0 5 10 15 20 25 30
01 02 03 04 05 06 07
Statistical discrepancy Change in stocks External demand
Gross fixed capital formation Public consumption Private consumption GDP
(% y-y)
(80) (60) (40) (20) 0 20 40 60 80
01 02 03 04 05 06 07
(4,000) (3,000) (2,000) (1,000) 0 1,000 2,000 3,000 4,000
Trade balance (RHS) Exports (LHS) Imports (LHS)
(% y-y, 3MMA) (US$mn, 3MMA)
-Economic growth accelerated to 6.5% y-y in 3Q07
-Trade account surplus has expanded
Exhibit 135. CPI Exhibit 136. Interest rate
(5) 0 5 10 15 20
01 02 03 04 05 06 07
Headline CPI Food Core (% y-y)
6 8 10 12 14 16 18
01 02 03 04 05 06 07
Nominal interest rate (3 month SBI rate) (%)
-Headline CPI inflation rate remains stable
-Interest rates have stopped falling
Exhibit 137. Foreign exchange rate — Rp:US$1 Exhibit 138. Stock price index — JCI
8,000 8,500 9,000 9,500 10,000 10,500 11,000 11,500
01 02 03 04 05 06 07
(Rp:US$1)
0 500 1,000 1,500 2,000 2,500 3,000
01 02 03 04 05 06 07
(10/08/82=100)
-The rupiah has been on a moderate depreciation trend
-Stock prices were still rising until December 2007
Source: Indonesia Bureau of Statistics, Bloomberg and CEIC data
Economics | Indonesia Tomo Kinoshita
Indonesia charts — 2
Exhibit 139. Minimum wage and CPI Exhibit 140. Investment
0 10 20 30 40 50 60
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Minimum wage increase CPI increase
(% y-y)
(10) (5) 0 5 10 15 20
01 02 03 04 05 06 07
Machinery and others Building
Gross capital formation (% y-y)
-Minimum wages (real terms) to rise substantially this year
-Construction investment is increasing steadily
Exhibit 141. Consumer Confidence Index Exhibit 142. Government budget
50 65 80 95 110 125 140 155
02 03 04 05 06 07
Consumer Confidence Index Current Economic Condition Index
Consumer Expectation Index 2007 2008
Revised
budget
Approved budget (i) Economic growth (%) 6.3 6.8 (ii) Inflation rate (%) 6.5 6.0 (iii) SBI-3 month rate (average) (%) 8.0 7.5 (iv) Exchange rate per US$ (average) 9,100 9,100 (v) Indonesian oil price (average) US$60/bbl US$60/bbl (vi) Indonesian oil production 0.95MBCD 1.034MBCD
-Consumer expectations recovering slowly
-CPI inflation forecast at 6.5% for 2007
Exhibit 143. Sales of motorcycles & cars and consumer loan interest rate
Exhibit 144. Central government budget forecast
(60) (40) (20) 0 20 40 60 80 100 120 140 160
01 02 03 04 05 06 07 08
10 12 14 16 18 20 Change in number of motorcycles sold (LHS) 22 Change in number of cars sold (LHS) Base lending rate (RHS)
(% y-y) (%)
(Rptn)
2007 Revised budget (a)
2008 Proposed budget
2008 Approved budget (c)
(%, y-y) ((c)/(a)-1)*100 A. Total revenue and grants 684.5 761.4 781.3 14.1
Domestic revenue 681.8 759.3 779.2 11.4
Tax revenue 472.8 583.7 592.0 23.5
Non-tax revenue 191.9 175.6 187.2 (8.5)
Grants 2.7 2.1 2.1 (22.2)
B. Expenditure 746.4 836.4 854.7 12.1
Central government
expenditure 493.9 564.6 573.4 14.3
Capital expenditure 68.3 101.5 NA NA
Subsidies 105.2 92.6 97.9 (6.9)
Non-subsidies 388.7 472.0 475.5 22.3
Transfer to region 252.5 271.8 281.2 11.4
C. Primary balance 24.3 16.5 18.0 (25.9)
D. Overall balance (A-B) (61.9) (75.0) (73.4) 18.6
(% GDP) (1.6) (1.7) (1.7) 6.3
Net domestic financing 74.6 91.7 90.0 20.6 Net foreign financing (12.6) (16.7) (16.7) 32.5
-Car sales show solid growth
-Central government deficit remains low
Source: Indonesia Bureau of Statistics, Bloomberg, Reuters, NNA, Bank Indonesia and CEIC data Note: Index above 100
indicates optimism and vice versa.
Note: National nominal minimum wage is weighted by provincial GDP.
CPI increase for 2007F is forecast by Nomura Singapore.
Economics | Indonesia Tomo Kinoshita
Exhibit 145. Indonesia : macroeconomic data and Nomura forecasts
Notes: Approved FDI excludes oil & gas, financial institutions, and part of mining. Base year for the consumer price index is 2002 after 2003; and 1996 before 2002. The fiscal year is January-December. Import coverage calculated based on custom basis data. Credit ratings for 2008 as at 28 January, 2008
Source: Bank Indonesia, Indonesia Bureau of Statistics, Asian Development Bank, Bloomberg, CEIC data
2002 2003 2004 2005 2006 2007E 2008F 2009F
National account (real, % y-y)
GDP 4.5 4.8 5.0 5.7 5.5 6.3 6.2 5.5
Private consumption 3.8 3.9 5.0 4.0 3.2 4.9 4.8 5.1
Public consumption 13.0 10.0 4.0 6.6 9.6 5.4 7.1 6.3
Gross fixed capital formation 4.7 0.6 14.7 10.8 2.9 8.4 12.9 8.6 Increase in inventory (contribution) (2.0) 2.2 (1.3) (0.4) (0.3) 0.2 0.3 (0.1) Exports, goods and services (1.2) 5.9 13.5 16.4 9.2 8.3 7.1 8.1 Imports, goods and services (4.2) 1.6 26.7 17.1 7.6 8.1 9.8 9.5
Agriculture 3.4 3.8 2.8 2.7 3.0 N/A N/A N/A
Construction 5.5 6.1 7.5 7.4 9.0 N/A N/A N/A
Manufacturing 5.3 5.3 6.4 4.6 4.6 N/A N/A N/A
Services 3.8 4.4 5.4 5.0 6.2 N/A N/A N/A
Size of the economy etc
Nominal GDP (US$bn) 195.3 234.9 257.0 287.0 364.6 412.8 457.0 512.2 Nominal GDP (Rptn) 1,822 2,014 2,296 2,785 3,338 3,772 4,273 4,789 Nominal GDP (Rp, % y-y) 10.7 10.5 14.0 21.3 19.9 13.0 13.3 12.1 Population (mn) 210.7 213.6 216.4 219.2 222.1 224.9 N/A N/A GDP per capita (US$) 927 1,100 1,188 1,309 1,642 1,835 N/A N/A Unemployment rate (average) 9.1 9.5 9.9 11.2 10.3 N/A N/A N/A Gross national savings (% GDP) 23.9 21.0 20.7 23.2 N/A N/A N/A N/A
External indicators
Exports (customs, US$, % y-y) 1.5 6.8 17.3 19.7 17.7 13.4 14.2 9.8 Imports (customs, US$, % y-y) 1.1 3.8 43.2 24.0 5.8 18.3 15.2 11.2 Trade balance (customs, US$bn) 25.9 28.5 25.1 28.0 39.7 42.1 47.4 50.9 Current account (US$bn) 7.8 8.1 1.6 0.3 9.9 11.2 16.5 20.0
Current account (% GDP) 4.0 3.4 0.6 0.1 2.7 2.7 3.6 3.9
Capital & financial account (% GDP) (0.6) (0.4) 0.7 0.1 0.7 N/A N/A N/A Approved FDI (US$bn) 9.7 13.5 10.3 13.6 15.6 N/A N/A N/A International reserves (US$bn) 32.0 36.3 36.3 34.7 42.6 56.9 N/A N/A Import coverage (months) 12.3 13.4 9.4 7.2 8.4 N/A N/A N/A External debt (US$bn) 131.3 135.4 137.0 130.7 128.7 N/A N/A N/A External debt (% GDP) 64.5 56.9 55.4 46.1 34.8 N/A N/A N/A Short-term external debt (% GDP) 11.7 9.8 9.5 8.5 N/A N/A N/A N/A
Fiscal indicators (% GDP)
Central government expenditure 17.7 18.7 18.6 18.3 20.0 N/A N/A N/A Central government revenue 16.4 17.0 17.6 17.8 19.1 N/A N/A N/A Central government balance (1.3) (1.7) (1.0) (0.5) (0.9) N/A N/A N/A Public debt (Rptn) 1,087 1,095 1,171 1,187 1,103 N/A N/A N/A
Public debt 59.7 54.4 51.0 42.6 33.0 N/A N/A N/A
Money, prices and forex rate
Money supply M2 (average) 8.0 6.4 7.4 12.5 15.4 N/A N/A N/A Loan growth (average) 9.6 22.4 22.8 28.7 14.4 N/A N/A N/A
CPI (average) 11.9 6.8 6.1 10.5 13.1 6.4 6.4 6.2
Wholesale prices (average) 4.1 3.2 7.4 15.2 14.1 N/A N/A N/A 1-month SBI (average) 14.95 9.96 7.43 9.18 11.83 8.58 7.88 7.63 1-month SBI (year-end) 12.93 8.31 7.43 12.75 9.75 8.00 7.75-8.00 7.75-8.00 Rp:US$1 (average) 9,327 8,574 8,933 9,705 9,155 9,139 9,350 9,350 Rp:US$1 (year-end) 8,940 8,465 9,290 9,830 9,020 9,335 9,350 9,400
Credit ratings (long-term foreign currency, year-end)
S&P CCC+ B B+ B+ BB- BB- BB- N/A
Moody's B3 B2 B2 B2 B1 Ba3 Ba3 N/A
Economics | Philippines Yuichi Izumi
Philippines
Yuichi Izumi Exhibit 146. Philippines: summary of Nomura forecasts
2004 2005 2006 2007 2008F 2009F National account (% y-y, on a real basis)
GDP 6.4 4.9 5.4 7.3 5.3 5.6
Private consumption 5.9 4.8 5.5 6.0 5.3 5.3 Public consumption 1.4 1.6 6.1 10.0 9.5 5.5 Gross fixed capital formation 1.3 (6.6) 1.4 9.5 8.0 6.8 Increase in inventory
(contribution to GDP growth rate)
1.2 (0.5) 0.2 0.0 (0.2) (0.6)
Exports, goods and services 15.0 4.8 11.2 3.1 2.8 5.0 Imports, goods and services 5.8 2.4 1.9 (5.4) 4.3 4.0
GNP 6.9 5.3 6.1 7.8 5.8 6.3
Net factor income from abroad 13.5 10.8 13.3 12.6 10.5 12.8 Exports (custom, US$, % y-y) 9.5 4.0 14.9 4.6 4.2 5.8 Imports (custom, US$, % y-y) 8.8 7.7 9.2 5.2 10.9 5.2 Trade balance (custom, US$bn) (4.4) (6.2) (4.4) (4.9) (8.7) (8.9) Current account (US$bn) 1.6 2.0 5.9 6.0 5.5 7.1 Current account (% GDP) 1.9 2.0 5.0 4.1 3.1 3.5
CPI (average) 6.0 7.7 6.3 2.8 4.1 3.7
91-day treasury bill yield (year-end) 7.8 5.2 4.8 4.2 3.50-5.50 3.50-5.50 P:US$1 (year-end) 56.3 53.1 49.0 41.2 38.0-43.0 36.0-41.0 Source: Nomura FERC, BSP, NSCB, NSO of the Philippines, CEIC data