Daily Indonesia: Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed and more

In this briefing:

1. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed
2. Are Chip Oligopolies Real?
3. Global Banks: Some New Year Pointers
4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy
5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

1. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed

Widodo maintains his 20 point lead in a late December poll, while PDI-P looks poised to control over 40% of the next parliament — rendering the recalcitrant Party Chair Megawati an unconstructive power broker.  Uno is pressing salient points about inflation and jobs, but Prabowo strikes discordant tunes.  KPK members suffered bomb threats at their homes.  The Riau-1 case increasingly implicates the industry minister, Golkar Chair Airlangga Hartarto.  The new ambassador to the US is a competent economist. 

Politics: Megawati delivered a high‑profile address to party members and dignitaries, including President Joko Widodo, that showed no inkling of embracing economic or governance reforms, despite their clear urgency.  Widodo lavished praise on the chair of the party to which he belongs; the hyperbole merely underscored his awkwardness with the powerful and imperious party chair (Page 2).  Vice Presidential Nominee Sandiaga Uno reiterated the importance of prices and jobs to voters, and downplayed the benefits derived by the poor from infrastructure works.  He is honing his messaging, but he still lacks solutions and Prabowo Subianto strikes discordant tones (p. 3).  The Solidarity Party (PSI) gained notice by issuing ‘Falsehood Awards’ to Prabowo, Uno and Partai Demokrat’s Andi Arief.  But the inspired party is languishing with negligible popular support (p. 4). 

Surveys: President Joko Widodo still had a 20 percentage point lead over Prabowo Subianto as of late December, according to the survey firm Indikator Politik.  The poll also found that only 15 percent of respondents believe that Prabowo abducted pro‑democracy activists in 1997‑98, even though he himself has admitted to doing so (he denies having abducted those that never returned) (p. 5).  The Survey Network (LSI) noted continued strong support for Megawati’s PDI‑Perjuangan, while parties such as the National Democrat (Nasdem) Party, the National Mandate Party (Pan) and Hanura could suffer exclusion from the next parliament.  Islamic-oriented parties appear poised to lose a third of their seats – but it remains to be seen if Gerindra, which is expanding, embraces elements of an Islamic agenda.  Dominance by PDI‑P in the next parliament would bode ill for economic and institutional reform (p. 7).   

Justice: Although unharmed, two Anti-Corruption Commission (KPK) members were targets of attacks on their homes by unknown assailants.  Two Molotov cocktails hit Laode Syarif’s home and a fake pipe bomb was found at KPK Chair Agus Rahardjo’s (p. 9). 

Policy News: A former finance minister suggested a reverse Tobin tax on portfolio funds, but the current minister, Sri Mulyani Indrawati, pointed out its costliness (p. 10).  The information minister promised a long‑awaited ride‑sharing regulation soon (p. 13).

Appointments: A prominent macro‑economic policymaker of the Yudhoyono‑era, Mahendra Siregar, received induction as ambassador to the US, after having served for two years as the government’s chief advocate for the palm oil industry (p. 13). 

2. Are Chip Oligopolies Real?

In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles.  Here we will take a critical look at this argument to explain its fallacy.

3. Global Banks: Some New Year Pointers

Here is a look at how regions fare regarding key indicators.

• PH Score = value-quality (10 variables)
• FV=Franchise Valuation
• RSI
• TRR= Dividend-adjusted PEG factor
• ROE
• EY=Earnings Yield

We have created a model that incorporates these components into a system that covers>1500 banks.

4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*. 

5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers.