ECONOMICS: Oil & Japan impacts, Upgrade IDR to Rp8,250 & FDI surged - Credit Suisse

Robert is forecasting 2011F-12F Real GDP 6.0-5.5%, GDP per capita US$3,558-3,988, year-end CPI 7.0-5.3%, year-end IDR8,250-8,100/US$, average IDR8,620-8,175/US$, and year-end BI rate 7.50-7.50% respectively. IDR Rp8,250 is POSITIVE to Domestic Sectors, such as Auto (ASII), Banks (BMRI, BBNI), Cements (SMGR), Consumer (GGRM, INDF, ICBP)!

· Robert Prior-Wandersforde (Focus Asia (Q2 2011) Report available on request): We assess the implications of first, the political crisis in North Africa and the Middle East, which has sent oil prices up 30%, and second the worst natural disaster in Japan for decades. In its 2011 budget, the government estimated that fuel subsidies would amount to 1.5% of GDP, based on an oil price assumption of just USD80/barrel. World Bank suggest that a USD10/barrel increase in the oil price adds 0.2 percentage points of GDP to Indonesia’s budget deficit. Indonesia’s budget deficit came in well below expectations at just 0.6% of GDP last year, giving the government plenty of room for fiscal maneuver. All in all, we expect the oil price effect on headline inflation to be smallest in Indonesia, Malaysia and India. March headline inflation eased to 6.7% from 6.8% in February, but core inflation moved up. Our economists expect inflation to average 7.5% this year and 75bps more of rate hikes by the end of 3Q 2011. We see the central bank of Indonesia raising rates at least another 75bps this year, before growth concerns force a pause.

· The impact of the earthquake and tsunami will be both on Japan itself and the rest of Asia, some negative growth effects and upward pressure on prices are inevitable in the next few months. Our analysis suggests that Singapore, Hong Kong and Thailand are likely to suffer the biggest hits, while commodity producers, such as Indonesia and Malaysia, will be least affected both in the short and longer term. Japan will need plenty of commodities for the re-building process.

· We are bullish with IDR. We expect BI to continue favouring FX appreciation over rate hikes.

· Indonesia recorded a record breaking year of inward Foreign Direct Investment in 2010 of USD12.7bn (equivalent to nearly 2% of GDP and the early signs for 2011 are encouraging. According to figures from the country’s Investment Coordinating Board (BKPM) inward FDI rose 11.6% year-on-year in the first quarter. The breakdown of the numbers showed roughly one quarter of the investment went into mining, while, by country, Singapore accounted for by far the largest share (also around 25%).