Macro Strategy

The Headwinds And Tailwinds

  • US facing headwinds with the latest Beige Book indicating a dimmer outlook, while China’s stimulus brings new hope of growth revival.
  • Subdued corporate tax driven by moderating commodity prices last year, would lead to tight fiscal space. SAL usage should provide support.
  • The Tapera Fund will affect consumption in the ST but provide a larger safety net in the LT and will supporting safer investment assets.

Headwinds for the US, Tailwinds for China. The seemingly sclerotic US economy started to exhibit signs of moderation as we note two main points: 1. The second reading of 1Q24 US GDP growth has been revised down to an annualized rate of 1.3% (vs an initial estimate of 1.6%), which primarily owes to a slowdown in consumer spending, whose growth fell from 2.5% to 2.0% and 2. The latest Fed Beige Book (May24 edition – Exh 12) corroborates this slowdown, indicating a more pessimistic outlook due to rising uncertainty and greater downside risks. Retail spending was flat to slightly up, reflecting lower discretionary spending and increased price sensitivity among consumers. Some districts also reported reduced hiring expectations and wage growth normalizing to pre-pandemic levels. US consumers have resisted further price increases, leading to smaller profit margins for firms. As a result, recent dovish statements from FOMC member has made headlines, bringing the expectation of Sept rate cut back into consideration, with DXY falling back below 105 level.

 

By contrast, the IMF recently upgraded China's economic growth forecast for FY24 to 5% (from 4.6%) reflecting a stronger-than-expected 1Q24 GDP print coupled with the recent measures to address the ongoing slump in the property market, albeit gradually. A renewed hope for China property market revival has emerged with the introduction of CNY300bn property stimulus, enabling Chinese banks to lend to local SOEs for converting unused properties into public housing for sale or lease. The People's Bank of China will cover 60% of the loan principal in cash. However, the actual impact will take time, in our view, especially as the stimulus is relatively small, affecting less than 10% of China's overall unsold flats as of Apr24, not to mention the unfinished units and sold-but-unoccupied units. Lack market participation also seen as major risk as demand for affordable housing is likely to be weak in struggling cities and such a supply-demand challenge will result in a rather gradual improvement in China’s property market. (Exh 10 for details) While Indonesia will tend to benefit via the trade channel from a potential improvement of property construction in China, weaker Yuan presents greater ST risk for IDR due to prevailing cross currency risk.

 

Domestic Fiscal Headwinds with SAL usage to provide Tailwinds in 2H

Despite a growing fiscal surplus, the 4M24 State Budget pointed to weak revenue throughout 2024. One of the main contributors to state revenue, corporate income tax (reflecting the 2023 financial year) declined by 29.1% & 35.5% y-y on gross & net basis, respectively, worse than in 1Q24. We see that the high-base effect was the main culprit due to moderating commodity prices. Over the past twenty years, the commodity downturn phase has been followed by subdued tax income in subsequent years. Such a trend could lead to the fiscal deficit widening to 2.5% yet we believe it will be addressed by usage of SAL, providing fiscal space for the new government’s 100 days program later this year. On the other side, priority spending is still growing and interestingly, subsidy spending fell 2.9% y-y on lower subsidized fuel consumption (4.3mn KL vs 4.4mn KL). Such a trend, coupled with the recent correction in oil prices on the back of a de-escalation in geopolitical tensions, should mitigate the impact of higher subsidized fuel prices. Another risk catalyst would be the recent rising trend of BI’s contractionary monetary policy through SRBI auction would also reduce system liquidity.

 

The Tapera Fund – Headwinds for consumption, Tailwinds for Investment Assets. The newly issued government regulation (PP) on Public Housing Savings (Tapera) has sparked commotion amid the recent intensification of tax regulations and the planned VAT hike to 12% for next year. According to the regulation, all domestic workers with a monthly wage above the UMP will have their wages reduced by 2.5% (with the full fee being 3%, and the remaining 0.5% covered by the employer). This also includes informal workers, who are required to pay the entire 3% themselves.

 

In the short term, this will directly reduce disposable income for all participants, leading to adjustments in their spending habits, with discretionary items expected to be impacted the most. However, in the long term, this regulation will proportionately provide a larger safety net, supplementing existing measures like social security.

 

The accumulated assets under management (AUM) of BP Tapera, the appointed agency responsible for the collected funds, are projected to reach IDR 430tn by 2027 at a minimum. This projection is based on factors such as minimum wage growth, wage growth, term deposit rates, and an incremental 25% adoption over the next three years. We assume 3.3% growth in the workforce between 2024-2027, based on the CAGR of workers between 2021-2023, and the annual UMP growth of 3.3%, consistent with this year’s growth. The deposit rates are assumed to be 20 basis points lower than the BI Rate, with a modest expectation that BI will reduce the BI Rate by 25 basis points this year and by 50 basis points per year until 2027.

 

By then, BP Tapera is expected to be a significant player in the capital market, supporting banking liquidity (through deposits) and the fixed income market (safer investment assets), and providing support for future government bonds issuance to aid fiscal spending.

 

Capital Market – Foreign Inflows to Fixed Income Continue While Equity Outflows Increase

The yield of the US Treasury 10-year bond increased by 5 basis points, reaching 4.51% last week, while the yield of the 10-year Indonesian Government Bond (INDOGB) also rose by 2 basis points to 6.92%. Despite a slight appreciation of the dollar index, the IDR saw considerable depreciation of 1.61% closing at Rp16,250. Additionally, Indonesia's 5-year Credit Default Swap (CDS) increased by 1 basis point, reaching 72 basis points on May 31, 2024.

Fixed Income Flow - There was a notable weekly inflow of Rp4.34tn in foreign ownership of domestic government securities (SBN), with outstanding ownership rose to IDR807.34tn ( 30th May) with month-to-date (MTD) inflow surge to IDR17.47tn, the first monthly inflow so far this year. The recent peak monthly inflow was at IDRIDR23.5tn back in Nov- 23.

Conversely, the banking sector experienced further outflow of IDR21.28tn with a MTD outflow now surged to totaling IDR94.18tn, partly on the back of maturing govt bond (FR77 which matured on 15th May withIDR70.1tn outstanding.) Other domestic participant saw positive inflow, with Bank Indonesia (excluding repo) inflow of IDR28.08tn (MTD inflow of IDR60.24tn). Additionally, mutual funds saw weekly inflow of IDR1.63 trillion, while insurance and pension funds inflow recorded at IDR3.37tn.

 

Equity Flow - Foreign outflows surged to IDR4.6tn, in the 5th week of May and was the highest in the past 5 trading weeks. JCI saw considerable 3.5% weekly drop, closed below the important 7,000 mark. Year-to-date (YTD) 2024 outflows in the regular market now hit IDR12.9tn, with May outflows alone reached IDR13.0tn.

 

On monthly basis the commodity related stocks dominated the inflow standing with TPIA, AMMN, ADRO, MIKA, BREN, EXCL, PGAS, and MBMA consistently remained among the top inflows. Conversely, the domestic proxies such as the Big-4 Banks, ASII, TLKM, TOWR, and SMGR consistently remained on the outflow list.

 

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