• During our visit and ground checks, we observed that the Phase-1 development of Indonesia's new capital, Nusantara (IKN), is nearing completion for basic infrastructure, but civil servants’ housing delays have affected relocation efforts. We believe the additional budget for IKN and public works in 2025 will benefit contractors like Pembangunan Perumahan (PTPP) and Adhi Karya (ADHI). Indonesia's GDP grew by 5.05% in 2Q24, with steady growth expected at 5.1% for 2024. Further details on company visits across various industries are provided in the following pages.

• IKN Phase-1 development progress, and the next stage. During a visit to IKN, we found that the most basic infrastructure, including water and electricity, is near completion, along with key government buildings like the Presidential Palace. However, delays in constructing housing for civil servants have impeded relocation efforts. The next phase (2025-2029) will focus on expanding public transportation, residential areas, and government offices. An additional IDR27.8trn of the State Budget has been approved, and foreign investors from China and Australia have shown interest.

• Additional infrastructure budget supports contractors. The additional budget for 2025 allocated to the Ministry of Public Works and Housing (PUPR) and the IKN Authority (OIKN) will benefit contractors, especially PTPP and ADHI, due to their stronger financial positions. Indonesia’s House of Representatives (DPR) approved IDR116.2trn for PUPR, including IDR40.5trn for key projects, and IDR27.8trn for IKN infrastructure development. With c.IDR37trn still available for IKN contracts, PTPP and ADHI are poised to gain from ongoing infrastructure projects despite sector risks.

• Ministry of Finance (MoF): Steady growth, fiscal prudence, and strategic reforms drive progress. Indonesia's GDP grew by 5.05% YoY in 2Q24, driven by consumption, investment, and exports, with the eastern regions outpacing Java and Sumatra. MoF projects 2024 GDP growth at 5.1%, supported by stable inflation, government spending and consumer spending are likely to be boosted by the upcoming elections. A prudent fiscal policy will maintain a low budget deficit, and the 2025 budget will prioritise growth. Digital tax reforms aim to enhance economic transformation, while efforts continue to improve the low tax ratio.

• Association of Indonesian Retailers and Shopping Centre Tenants (HIPPINDO): Cautiously optimistic outlook. HIPPINDO’s chairman Yongki Susilo highlighted that uncertainties over the new government has caused consumers to hold off their spending – a single-digit growth is expected for consumer companies in 2024. The grocery sector shows positive prospects, while the fashion sector continues to struggle, except for activewear. Retail growth has slowed, and increased taxes could further impact the middle class. Still, Yongki sees the potential for a second consumer boom, particularly in beauty products, with significant foreign investment interest despite concerns over upcoming tax increases.

Source: RHB Securities Research - 17 Sept 2024