Jun 15, 2016 10:18:17
Oil at US$50/bbl – Sweet Spot for Indonesia; Tax Amnesty – On Schedule for June 2016 Implementation

- Higher oil price will reduce fiscal deficit — The Indonesian government now expects incremental revenue from the recent bounce in oil price to ~US$50/bbl. Despite Indonesia is a net importer of oil & gas, fiscal deficit could decline by Rp0.1- 0.9trn based on government’s calculation for every US$1/bbl of oil price increase. The government is currently using an oil price of US$35/bbl in their 2016 proposed budget and thus with higher oil prices, they should receive additional revenue from the oil & gas sector.

- Gasoline being sold at c.US$50/bbl equivalent after taking into account the distribution margins of Pertamina — The current price of gasoline at Rp6,550/litre translates to c.US$48-50/bbl of oil prices. Thus the government is already at a comfortable level in terms of the selling prices of gasoline, and should see no pressure to increase the prices unless the oil prices were to increase to a higher level, say US$55-60/bbl. At Rp6,550/litre, Pertamina is making a distribution margin of Rp1,010/litre, as per government calculations (see Fig 1 for government’s detailed calculation of fuel prices).

- Non-subsidized fuel (RON97) in Malaysia is cheaper vs that in Indonesia — RON95 gasoline price in Indonesia (Rp8,250/litre) is +22% higher than RON97 price in Malaysia (Rp6,715/litre). The RON97 in Malaysia is a non-subsidize fuel while the RON95 is still being subsidized and sold at Rp5,575/litre.

- Tax amnesty is still on schedule to be passed in June 2016 — We see such an outcome as not being priced in by the market (see our recent Indonesian strategy note - Still Positive: Spotlight on Five Key Issues for Market). The parliament head of commission XI, Ahmadi Noor Supi, mentioned that tax amnesty bill will not get delayed since it is a critical part of the government’s 2016 budget revision. As per the government, they have included proceeds amounting to ~Rp103trn (US$7-8bn) from the tax amnesty bill in the 2016 revised budget.

- Maintain our positive view on the market — At a 1-year forward PER of 15.1x, the JCI is not cheap but nor does it look overly expensive, and we maintain our 5,700 target (+16%) set last October. Sector-wise, we continue to like property, construction and infra. $ASII rejoins our top picks and we see more value in banks as gainers from the expected passage of a tax amnesty bill. Top picks: $BBNI, $BBTN, $LPPF, $TLKM, $ASII, $MIKA, $PTPP, $ADHI, $BSDE, $CTRA, $PWON and $JSMR.

- Key market catalysts and risks — 1) Tax amnesty; 2) Lower personal income tax which would lift purchasing power. Risks: 1) Fed rate hikes; 2) Delay in passage of tax amnesty; 3) Heavy-handed policy intervention