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Too many cooks spoil the economic broth
The parliament's 325-to-212 vote against the bailout of Bank Century suggests that the government's coalition in the House of Representatives is in jeopardy
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he parliament's 325-to-212 vote against the bailout of Bank Century suggests that the government's coalition in the House of Representatives is in jeopardy. On the flip side, President SBY has publicly defended the government's decision to bail out Bank Century. This means that political communication between the legislative and executive bodies will deteriorate going forward in our view.
Without a political compromise, we reiterate our 2010 GDP growth estimate of just 5.2 percent, lower than the government's 5.5 percent forecast. In fact, the media has suggested that the parliament is prepared to come with new political maneuvers, which could result in the delay of the 2010 revised budget (APBN-P) scheduled for this month.
Meanwhile, Bappenas, the National Development Planning Agency, stated that budget implementation would only take place three months post the budget approval. Late disbursements would mean regional governments suffering most. Currently, 30 percent of total spending of Rp 322.4 trillion is transferred to the regions through the balanced funds scheme.
If the planned revised budget were delayed, the implementation of infrastructure-related projects could be postponed as well. On education, the delay would adversely impact the School Operational Aid (Bantuan Operasional Sekolah) as the government has allocated 20 percent of the 2010 budget towards education.
On domestic investment, higher political tension would mean uncertainties on the implementation of various expansion plans. This could threaten the achievement of the government's plan to bring down the unemployment rate to 7.5 percent in 2010 from the current 7.9 percent.
At this point in time, we believe there are downside risks to our corporate earnings, particularly for stocks in the banking, cement, infrastructure and consumer sectors. While it is difficult to quantify how much earnings would be impacted by the current political fallout, we have done some sensitivity analysis (exhibit 1-3) to see how lower top line performances would impact net earnings.
On the banks, the state-owned ones such as Bank Negara Indonesia (BBNI) and Bank Mandiri (BMRI) are likely to be hurt more given their larger exposure to corporate loans in our view. However, Bank Danamon (BDMN) is worst affected by every 1 percent drop in loan growth due to its relatively small proportion of fee-based income to total income.
On cement, we have done an exercise on 1 percent lower volume with Semen Gresik (SMGR) being worse off due to the company's lower volume growth and fixed interest expense stemming from its expansion requirement. On the consumer and infrastructure sectors, our sensitivity analysis shows that Adhi Karya (ADHI) and Ramayana (RALS) would suffer most due to their high fixed costs. The latter would also be hurt due to its discretionary business nature and regional exposure.
Therefore, in order to ensure that the Indonesian economic broth will not be spoilt, it is imperative going forward that the government, as head chef, must once again take charge of all the different cooks and prescribe the proper ingredients and seasonings for the country's economic prosperity.
