Macro Strategy

The Next Key Focus Post Election

 

  • The ongoing real count continues to support the Quick Count results. Prabowo-Gibran’s wide victory margin has led to a surge of inflows.
  • While fiscal space can sustain additional spending in the initial years, the importance of fiscal re-prioritization grows.
  • MSME are still confident in their rising business activity as purchasing power remains strong according to the BRI Institute MSME Index.

Market exuberance from Prabowo-Gibran’s Victory. Prabowo's upcoming presidency is widely acknowledged, with all preliminary counts pointing to his victory. The ongoing real count by the KPU, which has surpassed 50% of the voting locations, further supports these initial results. The single-round victory outcome should reduce uncertainty, particularly concerning policy continuity, serving as a significant positive factor for investors, with foreign inflows surging last week. The first-round victory with a significant margin enhances the overall result, although there is still the potential for the outcome to be brought to the Constitutional Court.

 

The Key Initiatives. The exuberance in the market is now shifting towards Prabowo's key initiatives. We delve deeper into Prabowo's key economic plans, with a specific focus on the execution of the Free Lunch program, fiscal deficit outlook and the push towards a 23% tax ratio.

  1. On the former, as outlined in Prabowo's campaign platform, the free lunch program, benefiting 82mn students and expecting mothers, is set to be fully rolled out by 2029. The program will be gradually phased in from 2025 to 2029, with a focus on addressing high stunting prevalence and prioritizing provinces with elevated rates. The coverage is projected to expand from 20% of total students in 2025 to encompass 100% by 2029. With a daily budget of Rp16k/beneficiary, adjusted annually for inflation, we project the program's budget to reach Rp424 tn by 2029.  While at the program's outset, it may not lead to significant shifts in fiscal spending priorities, as it progresses, the importance of fiscal re-prioritization grows. The option to reallocate fuel subsidies would potentially put consumption at risk, although the recent realization for both fuel subsidies and compensation realization were below target.
  2. During the initial years of Prabowo's term, there is room within the fiscal space to accommodate increased spending. Such elevated expenditures can be feasibly financed through additional debt while ensuring the debt-to-GDP ratio remains <3%. However, starting from the third year onward, the new government must intensify its efforts to increase revenue growth in order to keep the fiscal deficit below 3%.
  3. The primary focus is on achieving the 23% tax ratio, a significant economic policy. Despite assuming a 9% annual growth in Nominal GDP over the next five years, reaching the 23% tax ratio appears arduous and would necessitate extensive initiatives. Historically, the tax ratio averaged 10.6% from 2010 (excluding COVID-19 years), and to meet our baseline 2029 Nominal GDP forecast of Rp35,039tn would requires 9% annual tax collection growth between 2024-29, exceeding the 5-year and 10-year growth rates of 7.2% and 7.3%, respectively. As such, achieving the 23% ratio by 2029 demands a substantial 27% surge in government tax collection, more than twofold increase and unprecedented leap. Prabowo plans to facilitate this through a separate State Revenue Agency (BPN), distinct from the Ministry of Finance. However, relying solely on current tax strategies may render the target unattainable, necessitating broader initiatives, in our view.

MSME are still confident in their rising business activity.

As highlighted in the latest BRI Institute Small and Medium-Sized Enterprises (SMSE) Index, the SMSE displayed robust activity in the 4Q23, although it softened compared to the previous quarter. This resilience stemmed from higher selling prices and increased investment activity. However, production volume remained subdued in 4Q23, consistent with a slower pace of input material orders. Notably, the agriculture sector was the only one to experience contraction in 4Q23 (please refer to Exh. 16).

Moving into 1Q24, SMSE across all sectors maintain confidence in their growing business activity, evidenced by higher production volumes, increased selling prices, and expanded labor hiring. Particularly high confidence is observed in the manufacturing, hotel and restaurant, and services sectors. Manufacturing accounted for 50% of SMSEs respondents (Exh. 17).

The overall activity of SMSE is further reflected in the sentiment of businesspersons, who noted a slowdown in overall economic activity but expressed improved expectations for 1Q24. This positive outlook is primarily attributed to the end of the dry season, expected to stimulate agriculture production and output. The improved sentiment was realized in increased consumer confidence in January 2024 which boosted by higher Job Availability.

 

Capital Market – Market Exuberance on Election Quick Count results

Fixed Income – The yield on the US Treasury 10-year bond rose by 13 bps to reach 4.30% last week, following higher-than-expected CPI figures in January. However, the yield on the 10-year Indonesian Government Bond (INDOGB) remained steady at 6.62% during the same period, mainly underpinned by positive sentiment post peaceful election with Prabowo-Gibran secured decisive margin victory based on various quick count. Moreover, despite Dollar Index (DXY) 0.21% w-w increase, IDR in fact strengthened 0.10%, closing at IDR15,620. Indonesia's 5-year Credit Default Swap (CDS) also decreased by 2 basis points to 72 basis points.

Prior election on the 14th Feb, the Ministry of Finance (MoF) reported weekly foreign outflow of IDR3.55 tn, with foreign holdings of domestic Government Securities (SBN) down to IDR838.76 tn, with MTD on February 13, 2024, down outflow reached IDR3.13 trillion. Similary, the banking sector continued to experience weekly outflow of IDR45.53 tn, with MTD outflow reached IDR87.87tn. On the contary, Bank Indonesia (excluding repos) continue to see huge weekly inflow of IDR58.30 tn, which lead to MTD inflow of IDR113.11 tn. Mutual funds also saw weekly inflow of IDR200 bn, while insurance and pension funds experienced an inflow of IDR1.02 tn last week.

Equity - During the 2nd of February 2024, which coincided with the election week, foreign inflows surged to IDR 6.7 tn, contributing to a 1.4% weekly return. On YTD basis, foreign inflow in the regular market reached IDR15.0tn.

While on MTD basis, the total inflow was IDR 11.3 tn, primarily driven by buying actions in Big-4 Banks of IDR 8.2 tn, accounting for 72.7% of the total MTD inflow. Other contributors to the inflow: TLKM, SMGR, and ADRO.

Interesting observation:

  1. KLBF, ICBP, and INDF finally emerged in the top inflow list, reversing the trend after experiencing net outflows for 4-5 consecutive months.
  2. Despite market strong performance GOTO, ASII, MDKA, and ANTM consistently remained among the outflow list.
  3. BTPS continued to be a top outflow, maintaining the outflow trend for the sixth consecutive month.
  4. Post three consecutive months of foreign inflow, UNVR was included in the top outflow, mainly on weak sales volume across the board and we have recently downgrade the counter to Sell.

 

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