Mandiri Sekuritas Economy 2010: Cautious Optimism

􀂄 We expect Indonesia’s economic growth to accelerate to 5.2% in 2010 from 4.3% expected in 2009. Improvement in investments, driven by government infrastructure spending, global economic recovery and relatively strong private consumption will drive the economy next year.

􀂄 There are concerns on rising inflationary pressures next year as domestic demand is expected to recover while electricity tariffs, LPG, and possibility gasoline prices will be likely be hiked too. At this juncture, we think inflation is to increase to 6.3% from below 4.0% expected in 2009. Accordingly, we think Bank Indonesia may have to start raising its key interest rates in June 2010 by 25-bp increment to 7.25% from the current rate of 6.5%.

􀂄 We expect the rupiah to strengthen on the back of weakening US$ and strong capital inflows. Solid economic growth and attractive valuations on portfolio investment, coupled with government commitment to boost infrastructure spending, we think, would not only attract portfolio but also direct investment. We expect the rupiah to strengthen to Rp9,336/US$ and Rp8,927/US$ by the end of 2009 and 2010.

􀂄 Despite the optimism, uncertainty in global economy may pose risk on Indonesia economy performance. Any unprecedented factor that threatens global financial system stability may create risk aversion, which would trigger capital outflow. Domestically, besides high inflation, higher risk may rise should government delay its infrastructure development agenda, which could slow down recovery in investments.