Bank Indonesia Is Likely To Cut Benchmark Rate

Bank Indonesia (BI) will announce the benchmark rate today after it ends its two-day board of governors meeting that began on Wednesday. From the domestic side, there are signs of improvement in the country’s macroeconomic data, which include a YoY inflation rate decline to 4.1% in January from 7.0% a year earlier (12M15:3.4%). The gap between inflation and BI rate is still huge while the core inflation also remains manageable at below 5%. Going forward, the inflation burden will remain relatively soft as the electricity tariff declines this month and there is a possibility of further cut in domestic fuel prices next month. In addition, current account deficit (CAD) in 4Q15 reached 2.4% of GDP, which was basically in line with BI’s previous target of CAD sustainable level at 2.5% of GDP. From the external side, a reduced bet arising from US interest rate hike this year also helps the pressure on Rupiah to subside. Furthermore, BI is expected to cut rate further to spur growth given weak latest imports number in January 2016, pointing to still weak domestic demand in early this year.

The recent industrial gas price reductions in North Sumatra

The recent industrial gas price reductions in North Sumatra have provided more clarity on gas price cuts in other areas. Since almost all Indonesian ceramic tile producers – except Arwana – booked 3Q15 operating losses, gas price cuts are very crucial to help lift the ceramic industry out of financial difficulties. Assuming Arwana’s gas price cut could happen in 2017 at USD1/mmbtu, we raise FY17F earnings to IDR318bn (+17.6%) but kept our FY16F numbers. Maintain BUY with a higher IDR690 TP (24% upside) now based on DCF (from targeted P/E). 

 

More clarity on gas price reductions. Media reported that Perusahaan Gas Negara (PGAS IJ, NEUTRAL, TP: IDR3,200) and PT Pertamina Gas have collaborated to reduce industrial gas prices in the North Sumatra region while awaiting a presidential decree on lower gas prices. The recent industrial gas price reductions in North Sumatra have provided more clarity on gas price cuts in other distribution areas.

 

Rising gas prices deal a heavy blow to earnings. 3Q15 was the worst quarter in which almost all Indonesian ceramic tile producers – except Arwana – booked operating losses. Industrial gas price jumped to ~USD10/million British thermal units (mmbtu) in FY15F from USD6.62/mmbtu in FY10. In the same period, Arwana’s energy cost doubled to IDR10,700/sq m (from IDR5,400/sq m). Gas price cuts are significant to Indonesian ceramic companies since gas prices contributed around 30-35% of cost of goods sold (COGS). Hence, lower industrial gas prices are very crucial to help lift the companies out of financial difficulties. 

 

Lifting FY17F earnings. The timeline and amount of gas price cut for Arwana’s plants are still unclear. However, based on our checks, Directorate General of Oil & Gas has confirmed that the ceramic and glass industry would have gas price reductions in the range of USD1-2/mmbtu. 

Economic Growth Picked Up In 4Q 2015 And Will Likely Gain Pace in 2016

Indonesia GDP growth increased to 5.0% y-o-y in 4Q, after holding stable at +4.7% in the previous three quarters. This was due to higher gross fixed capital formation (investment) and government consumption spending but offset partly by a smaller net export and a moderation in household consumption. 

By industrial origin, this was reflected in faster growth in electricity & gas activities and activities in transport & warehousing; accomodation, food & beverages; construction; financial services & insurance; services and trade sectors. A slowdown in manufacturing, agriculture, mining, water supply, information & communication, and real estate sectors, however, posed a dragged to the overall growth. 

 

Overall, 4Q 2015 economic growth showed resilient domestic demand helped cushioned sluggish external trade performance.

Money Supply Growth Edged Down, Yet Loan Growth Accelerated in December

Indonesia’s Money Supply (M2) growth edged downto 8.9% y-o-y in December, from +9.2% in November and +10.4% in October. The slowdown was due to moderation in domestic operation, as the central bank’s liabilities to the government rose, arising from the USD3.5bn global bond issuance in December to finance 2016 state budget. This was, however, mitigated by a slight increase in total loan and an increase in net foreign operation.

The increase in total loans was due to higher growth in loans extended for working capital and investment. Separately, deposit growth stabilised in December, as an increase in savings and demand deposits was offset by a decline in time deposits. 

Meanwhile, Indonesia rupiah (IDR) is susceptible to uncertain global financial markets and will likely stay weak in the near term. Hence, Analyst expect the IDR to hover around 14,200-14,600 in 2016.

Indonesia’s Money Supply (M2) growth edged down to 8.9% y-o-y in December, from +9.2% in November and +10.4% in October.The slowdown was due to a slower increase in net domestic asset caused by a rise in the central bank’s liabilities to the government, arising from a USD3.5bn global bond issuance in December to finance 2016 state budget. This was mitigated by a slight increase in total loan growth, as more loans were given to private sector amid early recovery in economic activities. Similarly, net foreign operation recorded a faster increase to 6.4% y-o-y, from 2.4% in November, as the government external debt repayment was offset by higher external debt during the month. Nevertheless, narrow money growth fastened to 12.0% y-o-y in November, from +10.0% in November and +10.2% in October due mainly to a highercash demand by households in tandem with year-end holiday celebration.