DBS cautious on Indonesia's recovery amid surge in Covid-19 cases

INDONESIA will likely see slower-than-expected economic recovery, hindered by additional restrictions amid a rise in Covid-19 cases in the country, DBS said in a research note on Friday.

The bank expects gross domestic product (GDP) growth for Indonesia will be 4 per cent in 2021, due to setbacks in the reopening of the economy in the second half of the year. This is instead of the initial government and consensus prediction of 5 per cent, which DBS said is "too optimistic".

Previously, the market had been expecting the Indonesian economy to recover in H2 on the back of reopenings. But recently, Bank Indonesia and the Ministry of Finance revised their GDP forecasts for 2021 to 4.1-5.1 per cent and 4.5-5.3 per cent respectively, given the nature of the pandemic in the country.

The government has implemented more stringent measures in Java and Bali, such as mall closures and stricter work-from-home arrangements after a recent spike in Covid-19 infections.

Although it is not a nationwide lockdown like the one in 2020, the restrictions will likely have an impact since Java and Bali account for about half of Indonesia's economy, DBS said. Bali, in particular, will likely be heavily affected since it relies on both domestic and overseas tourism.

Given the uncertainty around how long the measures will be in place, the bank is warning investors to remain cautious, even though the Jakarta Composite Index (JCI) may be cheaper than peers in the region.

The JCI had underperformed most of its peers in South-east Asia in the first half of 2021, which DBS said is likely due to low vaccination rates and a lack of positive catalysts.

It said that "it is obvious investors favour countries with a higher vaccination rate", thus an increase in the vaccination rate will likely improve sentiment in Indonesia. But the bank added that Indonesia "still has a long way to go" since less than 20 per cent of its population is vaccinated today, although it noted the government's plan to ramp up its vaccination programme.

Amid the emergency measures, the tourism, travel, hotel, transportation, retail, restaurant, F&B and commercial property sectors will likely be hit the hardest.

Furthermore, DBS said US tapering may also overshadow the index performance in H2. It noted that the JCI had "held up relatively well" in June until the Fed announced potential interest rate hikes, where it corrected by as much as 5 per cent before recovering towards the end of the month, which is similar to Indonesia's weak performance prior to the Fed's tapering programme in 2013.

Comparatively, the recent surge in Covid-19 cases in late-June did not seem to have a big impact on the economy, likely because most of the downside risks related to the coronavirus are already known.

The bank said it prefers to be defensive and recommends stocks that can weather the near-term uncertainty or do better even with the rising number of infections.

These include Mitra Keluarga in the healthcare sector, since hospitals are seeing more Covid-19 patients than in January, and XL Axiata in the telco space, which should benefit from data consumption during mobility restrictions and consolidation in the industry.

DBS also noted that big-cap stocks have underperformed this year, and recommends accumulating those with resilient earnings, such as Bank Central Asia, Indofood CBP and London Sumatera.

In addition, Indonesia's digital sector may be an upside due to the upcoming listing of unicorns Bukalapak, Gojek and Tokopedia, although it noted that options are still limited at the moment. DBS expects telco companies can be a proxy to digitalisation in Indonesia, and recommends Sarana Menara, since it can provide the infrastructure to support the digital economy.

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