Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Country Assessment
Regional Equity Strategy Q4 2007
Meanwhile, we note that the government’s expansionary budget is targeted at quality
development, with emphasis on infrastructure development and welfare programs. The
government still has capacity to use its Rp101.5tr resources to finance infrastructure projects
such as roads, railways, ports and bridges. These infrastructure projects are the basic
requirements for Indonesia to build a foundation for sustainable economic growth and
efficiency. Sectors with exposure to infrastructure, such as cement and construction, are set to
benefit from the country’s infrastructure development.
GDP and Goods & Services Exports
Exports to Japan and USA
Rptr
1,000
875
31.0%
30.0%
25%
20%
Japan
US
750
625
29.0%
15%
500
28.0%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
GDP (LHS) Exports of Goods & Services as % of GDP (RHS)
Source: BPS
10%
Source: BPS
2003 2004 2005 2006 YTD Jun07
The main worry on the macro front is inflation. Rising food and energy prices were the main
drivers of inflationary pressure in August. DBS Economics expects inflation of 6.3% for 2007 and
6.5% in 2008. It also expects BI to deliver one more 25 bp rate cut in 4Q07. This will leave real
interest rates at 2% (vs historical average of 1.7%) and the USD/IDR yield differential at 325 bps.
We do not expect the cut to have significant impact on the Banking sector, as investors had
been anticipating one since early 3Q07.
Positive talk in the market includes the possibility of a 5% tax benefit for companies that listed
at least 40% of their shares on the stock exchange, in a bid to increase the market capitalisation
of the exchange, and to increase tax transparency of currently private companies although the
impact on bottom line is only c.7%. There is also talk of cutting corporate and personal tax rates
to make Indonesia more competitive to attract foreign investments – data show that countries
with lower tax rates are more efficient and have stronger economic structures. But in the end,
corruption, legal uncertainties and weak law enforcement remain key obstacles to the business
sector in Indonesia.
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