Macquarie Indonesian Strategy - State of the Nation address

Event
Indonesian President Susilo Bambang Yudhoyono (SBY) gave his State of the Nation address, revealing the 2011 budget and long-term economic growth targets. Overall, we believe that the GDP growth target for 2011 is conservative at 6.3% while the SBI rate of 6.5% looks aggressive. We believe the government understands what is important, given it has increased infrastructure development spending by 28% and civil servant and military salaries by 10%. Maintain Overweight on Indonesia.

Impact
Not so exciting on the macro indicators. The government's target of GDP growth of 6.3% looks unexciting to us, given that the running rate for the GDP growth in 2010 alone will reach around 6.2%. Our economist believes that economic growth could reach 6.5% in 2011. On the interest rate, the government is maintaining the three-month SBI rate of 6.5%, which is aggressive vs our expectation of a 50bp rate increase by end-2010. But Indonesia is currently one of the few countries in the region that is still experiencing a positive real interest rate environment; in contrast, countries such as India, China and Thailand have negative real interest rates.

Within expectations on state revenue. The government expects state revenue, including grants, to reach Rp1,086tr, up 10% YoY, and for tax revenue to contribute 77%, up 13ppt. Non-tax revenue (coming from revenue from the oil and gas sector and SOE dividend) is expected to contribute only Rp243tr in 2011, a 2% fall vs Rp247tr expected in 2010.

Government expenditure is more exciting; infrastructure spending +28% and civil servant salaries +10%. The interesting point in the budget highlights was the government's plan to increase infrastructure spending by 28% next year to Rp121.7tr (US$14bn). This is the highest increase among all expenditure items. Total government expenditure is expected to hit Rp1,202tr (19% of GDP), up 7% YoY while the central government will take up 69% of the expenditure allocation. Civil servant salaries will increase by 10% in 2011.

Development focus for 2011 and long-term economic target. SBY mentioned that the government will focus on reducing unemployment from 7.4% to 7.0% and the poverty rate from 13.3% to 12.5%. SBY revealed that the government had raised its economic growth target for 2014 from 7% to 7.7%, aiming to create 10.7m jobs.

Outlook
Positive overall. Although we think that the economic growth target looks conservative, the overall the budget looks positive and we believe focuses on what is important for the country. We believe Indonesia continues to pursue structural reforms by improving infrastructure spending and is trying to curb corruption by increasing salaries of civil servants. (Note that the lowest monthly salary in public service and police/military will be US$225 and US$295 from 2011, respectively, double and triple the minimum wages in Indonesia).We maintain our positive view on the country. Our preferred big-cap picks are Astra International, Bank BNI, BRI, BCA and Adaro.