Global credit rating agency Moody's Investors Service believes Indonesia's non-financial companies, specifically those engaged in the commodities sector, will see improving corporate earnings in 2017 due to rising commodity prices and the economic recovery of the USA. In a report released on Monday (21/11), Moody's states that commodity prices are expected to continue their upward movement in 2017. This will trigger investment in the mining, oil & gas and crude palm oil (CPO) sectors.
Gary Lau, Managing Director of Moody's Corporate Finance Group, estimates profit of non-financial companies in Indonesia growing in the range of 2-6 percent in 2017. This is also supported by Indonesia's macroeconomic growth with gross domestic product (GDP) growth estimated to accelerate to a pace of 5.2 percent (y/y) in 2017, from an estimated 5.0 percent (y/y) in 2016.
Meanwhile, quality of corporate credit - outside Japan - is expected to remain stable in 2017 supported by stable economies, rising commodity prices, and adequate market liquidity.
Moody's further stated that it is positive about the Indonesian government's efforts to boost infrastructure development across the nation because this will trigger the so-called multiplier effect, hence demand for construction services, building materials, and heavy equipment will rise accordingly in Southeast Asia's largest economy. The Indonesian government has allocated IDR 387.3 trillion in the 2017 State budget for infrastructure development, up around 30 percent from the previous budget, showing it is serious about upgrading the country's roads, railways, ports and airports.
Meanwhile, Moody's also sees Indonesia's consumer goods, property, automotive and electronics sectors rising after the recent slowdown. This improvement comes on the back of people's rising purchasing power and consumer confidence.
Regarding global protectionism, Moody's stated Indonesia is less vulnerable as the country's exports made up less than 20 percent of its GDP in 2015. This figure is much lower compared to regional peers such as Thailand, Vietnam, Singapore, Malaysia and the Philippines.
However, corporate refinancing may pose some challenges for Indonesia in 2017 due to the looming Federal Reserve interest rate hike and a further slowdown in the economy of China. These matters will cause severe volatility (particularly capital outflows from emerging markets), hence putting pressure on Indonesian assets.
Lucky Bayu Purnomo, analyst at Indonesian securities firm Danareksa, is neutral about commodities up to January 2017 when newly elect Donald Trump will be inaugurated as the 45th US president. However, Purnomo expects the crude oil price to rise in 2017 - provided the US dollar is stable - on the back of oil producers' commitments to curtail output (the OPEC meeting on 30 November 2016 will provide more information), while the coal price is expected to be flat next year (after a recent strong rally). Purnomo also sees the CPO price rising in 2017.
Kiswoyo Adi Joe, analyst at Recapital Securities, says coal miners are now in a better position. However, existing contracts are starting to expire toward the year-end, thus the price may become under pressure. Joe expects the coal price to fall below the crude oil price somewhere in 2017.
Regarding the CPO price in 2017, Ben Santoso (analyst at DBS Vickers Securities) expects to see some contraction due to a rise in the CPO supply. CPO production next year is expected to rise 11 percent (y/y). However, with expectation of rising demand, the CPO price may only fall 2 percent to USD $618 per metric ton in 2017.