Thu, 15 Apr 2010
Newly released report, Indonesia Business Forecast Report Q2 2010, provides detailed company analysis

(Companiesandmarkets.com and OfficialWire)

LONDON, ENGLAND


Political Bickering A Drag On Strong Economic Fundamentals.

Indonesia's economy continued to outperform strongly in Q409, registering real GDP growth of 5.4% y-o-y, taking full-year growth to a robust 4.5% for 2009. We remain bullish on Indonesia's growth prospects over the coming year, projecting real GDP growth to reach 5.2% in 2010, before accelerating to 5.5% in 2011. Underpinning this sanguine outlook are our expectations that the country's large domestic economy will continue to perform well and will be more insulated against any slowdown in China and the US. That said, the political situation has become less favourable for President Susilo Bambang Yudhoyono and we are worried that this may translate into slower economic reform.

Yudhoyono's position looks slightly shakier, especially as the Bank Century bailout scandal has been seized upon by the opposition to weaken the president's position and threaten key officials (most notably Finance Minister Sri Mulyani Indrawati and Vice President Boediono). We are maintaining our core scenario that Yudhoyono will do his utmost to defend the decisions made by both the officials. However, the scandal has clearly highlighted the infighting within the ruling coalition and we do not rule out an outside chance that either official may be pressured to leave office.

Although consumer price inflation has been increasing for several months, we believe thaTheadline price growth is still relatively benign and it will not be until late Q210 that Bank Indonesia (BI) will embark on a series of mild rate hikes, taking the benchmark rate from the current 6.5% to 7.5% by end-2010. Moreover, the central bank has also stated that credit growth is a priority this year.

Aside from lowering the secondary reserve requirement, BI will also need to keep the benchmark rate low for a longer period to encourage commercial banks to lower their lending rates.

Indonesia's scores a dismal 40.2 (out of 100) in our business environment ratings, dragged down by poor scores of 32.7 and 22.5 in the infrastructure and institutions subcomponents respectively.

Although efforts have been stepped up to combat graft in recent years, the corruption scandal involving the law enforcement agencies, and controversies over the Bank Indonesia bailout, clearly indicates that Indonesia still has a long way towards cleaning up its image. Meanwhile, although there are plans to reduce investment red tape and improve the infrastructure, we believe these initiatives are only likely to move at a slow-to-moderate pace.



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