On the back of lower oil prices, President Joko '€œJokowi'€ Widodo has announced a 13 percent cut in the gasoline price, from Rp 7,600 (61 US cents) per liter to Rp 6,600, nearly back to square one compared with the price during former president Susilo Bambang Yudhoyono'€™s administration when it was Rp 6,500 per liter.

President Jokowi'€™s move followed a recent 10.5 percent cut from Rp 8,500 per liter to Rp 7,600 on Jan. 1 (table 1).

Also announced was a cut in the diesel price, to Rp 6,400 per liter from Rp 7,250, down 11.7 percent. Furthermore, Jokowi decreased the state-owned cement producers'€™ ex-factory prices by Rp 3,000 per 50 kilogram bag to around Rp 53,000, translating to an approximately 5.4 percent price decline.

At this stage of the cycle, we have further lowered our 2015 average Brent oil price estimate to US$60 per barrel from $70.4 per barrel because of the continuing drop in oil prices (table 2). However, as we continue to believe the recent plunge in oil prices will not be sustained over the longer term, on production cuts from producers, we expect the end-2015 Brent oil price to bounce back to $65 per barrel (previous estimate: $78), before gradually rising to $75 per barrel (previous: $88) by end-2016 (table 1).

The above-mentioned factors, coupled with the current fixed fuel subsidy scheme (only diesel is subsidized at Rp 1,000/liter), have us lowering our 2015 consumer price index (CPI) target to 5 percent year-on-year (previous: 5.57 percent). As a result of lower inflationary pressure, central banks are fine-tuning their monetary policies to be more expansive. For instance, India'€™s monetary authority unexpectedly has cut both its reverse repo and repo rates by 25 basis points. This move should ease pressure on Bank Indonesia to lift its benchmark rate due to the expected Fed rate hike. Thus, we lower our BI rate outlook to a flat rate of 7.75 percent from 8 percent previously (table 6).

Our current view is to conservatively assume that the Fed is on track to start normalizing its benchmark rate policy in the third quarter of 2015 on solid US macroeconomic indicators amid the bleak global economic outlook. Therefore, we expect the rupiah to further weaken and hover at the 13,000 per US dollar level in the second quarter of 2015. Accordingly, we revise our average 2015 rupiah estimate to 12,627 per dollar (previous: 12,242 per dollar) and our end-2015 estimate to 12,000 per dollar (previous: 11,500 per dollar (table 2).

In the 2015 revised state budget proposal, the Jokowi administration has proposed lowering the energy subsidy to Rp 183 trillion (down 47 percent from Rp 344.7 trillion). Thus, the government would have Rp 155 trillion in fiscal room, with 60 percent (Rp 93 trillion) to be distributed to infrastructure-related projects, increasing total capital spending to Rp 290 trillion (up 85.3 percent). We expect budget hearings to run smoothly on lower political tension as the opposition camp has become weaker with two conflicting forces within the Golkar party apparently in deadlock.

Combined with the commitment of Indonesia'€™s Investment Coordinating Board (BKPM) to implement an integrated one-stop approval service, infrastructure support from the government should help to boost 2015 direct investment, which we expect to reach $47.8 billion, up 7.8 percent year-on-year.

Nonetheless, a drop in the oil price to a consistent level of below $60 per barrel would raise concerns on the state revenue side.

We believe the Jokowi government'€™s 2015 tax revenue target of Rp 1.49 quadrillion, up 30 percent from the 2014 unaudited realization of Rp 1.14 quadrillion, is too optimistic. If the government fails to secure the tax target and spending cuts are not an option, we believe the 2015 fiscal deficit target (of no higher than 3 percent of GDP) would be in jeopardy.

This would be because of lower oil prices having pushed the government to cut its 2015 oil revenue target from Rp 313 trillion to Rp 170 trillion (down 45.7 percent).

In summary, we revise up our 2015 GDP growth estimate to 5.37 percent from 5.04 percent, propelled by stronger domestic consumption backed by lower fuel prices and solid investment realizations, as well as a higher government contribution to the domestic economy through productive spending.

_______________

The writer is an economist at the research department of Bahana Securities.

Popular

RI, Australia strengthen partnership on taxing crypto assets

Analysis: Indonesia denies normalization with Israel to enter OECD

Citroen to produce electric cars in Indonesia