Daily Indonesia: The Burden of Too Big Government and more

In this briefing:

1. The Burden of Too Big Government
2. Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving.
3. Debt Ratios Do Matter
4. Much Ado About Credit

1. The Burden of Too Big Government

From our very own “Austrian” Leigh Skene:

Wars in old times were made to get slaves. The modern implement of imposing slavery is debt. Ezra Pound

Governments used public sector balance sheets to bail out private financial institutions and assist private companies to emerge from bankruptcy in the GFC. These actions transferred credit risk from the private to the public sector, yet falling nominal interest rates minimised, and in some cases froze, the cost of servicing the mounting government debt until late 2016. Since then, many borrowers have paid rising  interest rates on increasing amounts of debt. Debt service charges are rising faster than nominal GDP in a growing number of nations as a result. It is estimated that the US federal funding requirement will rise from minus US$ 700bn to US$ 2tr in 2022.

2. Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving.

Looking at the telco space for Emerging Asean markets in 2019, we see a number of key themes. 

• Revenue trends are likely to worsen in Thailand and the Philippines, but improve in Indonesia and possibly Malaysia. 
• Margin trends usually follow revenue but Indonesia will have the added benefit of reduced subscriber churn following the SIM registration completion in 2018.
• Political risk is elevated with elections in Thailand (although renewed talk of delays) and Indonesia.

Overall, Indonesia looks to be the most interesting market with rising revenue growth as the market stabilizes. Telekom Indonesia (TLKM IJ) is our top pick, followed by Xl Axiata (EXCL IJ). Elsewhere, Malaysia looks to be improving but valuations remain high.  The outlook has worsened in Thailand with DTAC (DTAC TB) getting hold of spectrum and now litigation risk coming to the fore with old cases with TOT/CAT. The Philippine duopoly faces the rude shock from the China Telecom Consortium’s entry in late 2019. 

3. Debt Ratios Do Matter

Monetary diarrhoea has inflated the debt structure.

The death of the Bretton Woods monetary system in 1971 paved the way for unbridled money printing. The resulting Great Inflation inflicted huge negative real returns on bondholders and stockholders until 1982. Thereafter, many countries, especially EMs, linked their exchange rates to the dollar, resulting in the fastest ever-growth in global foreign exchange reserves. In addition, central bank puts and then extraordinary fiscal and monetary policies turned it into the most virulent asset bubble in history, despite monetary mayhem, exemplified by numerous banking crises and three big stock market drawdowns. 

4. Much Ado About Credit

• Global financing conditions could tighten further
• Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
• A de-escalation in trade tensions and a Fed pause could ease the pain
• Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?