The stock performance of Indonesian companies listed on the Indonesia Stock Exchange (IDX) in 2016 is expected to be better than last year's performance. One of the factors that supports this assumption is Indonesia's accelerating economic growth. Most - if not all - analysts expect GDP growth to rebound from its six-year low of 4.79 percent (y/y) in 2015. Indonesia's Q4-2015 GDP growth at 5.04 percent (y/y) was already promising (supported by government spending). In 2016 a growth pace in the range of 5.0 - 5.2 percent (y/y) should be possible. Although the link is not perfect, there is a correlation between a nation's stock market and its GDP growth.
If 75 percent of companies listed on the Indonesia Stock Exchange still managed to post profit in 2015 despite the overall economy running at a six-year low, it provides high expectation that companies' corporate earnings should improve in 2016 in line with the rebounding economy. Moreover, earnings of companies focused on commodities are expected to improve as commodity prices have been gradually rising supported by rebounding oil prices since February 2016, while the crude palm oil (CPO) price is on its way to average between USD $650 - 700 per ton in 2016 (particularly supported by falling output in Indonesia and Malaysia due to El Nino-inflicted dry weather last year, while CPO demand remains solid backed by Indonesia's biodiesel program). Global credit rating agency Fitch Ratings published a report this week stating that the rating of palm oil companies may improve this year due to the higher CPO price, while their operational costs are expected to decline. So far this year Indonesia's agriculture index has climbed slightly over 6 percent. Indonesia is the world's largest exporter and producer of crude palm oil and therefore this industry is a key foreign exchange earner.
Meanwhile, efforts of the Indonesian government to push for economic growth through infrastructure development (causing the so-called multiplier effect) are expected to be more successful in 2016 while overall public spending realization is expected to be more smooth (as last year's budgetary changes led to weak state spending at the year-start). However, regarding government revenue (needed to be able to spend) the government still has trouble to collect a good amount of tax money due to the country's weak tax system, weak law enforcement, and low tax compliance. Therefore, the Tax Amnesty Bill could be a solution as government officials expect this bill to bring home between IDR 500 trillion (approx. USD $38 billion) and IDR 1,000 trillion (approx. USD $76 billion) in offshore assets, while increasing Indonesia's tax revenue by between IDR 40 trillion and IDR 100 trillion. If part of these funds can be directed at infrastructure development (through the buying of government bonds) it would be great. Amid such accelerated infrastructure development Indonesia's construction, cement and property companies should be able to post good earnings (particularly those companies that are majority-owned by the central government).
However, there is some uncertainty about the performance of Indonesia's banking sector this year. Firstly, Indonesia's Financial Services Authority (OJK) recently expressed its concern that huge additional liquidity (caused by repatriated funds within the framework of the Tax Amnesty Bill) may lead to a significant increase in the cost of funds as banks' liabilities pile up without returns. The OJK said there could be an additional USD $42 billion injected into local commercial banks before the year-end due to the repatriation of funds. It is therefore key to distribute these funds into productive assets.
Secondly, Indonesia's financial authorities are eager to curb lending rates to single-digit figures before the end of the year. Currently, Indonesia's lending rates are among the highest in the ASEAN region which disturbs regional integration in the financial sector (part of the financial integration chapter of the ASEAN Economic Community that is scheduled to come into place in 2020) and curtails Indonesians' demand for loans. Indonesia's financial authorities plan to push state-owned banks' net interest margin (NIM) down to the range of 3 to 4 percent in a bid to lower lending rates and boost credit growth. NIM is the difference between interest income generated by banks and the amount of interest paid out to the lenders. A lower NIM implies that banks become less profitable (although its customer base may widen). Currently, the average NIM for Indonesia's state-owned banks is between 7 - 8 percent, the highest in the ASEAN region where the average is in the range of 3 - 4 percent.