Jakarta/Hong Kong. At the start of 2012, Indonesia was basking in
accolades for its economic performance. It was home to the world’s
best-performing emerging stock market over 2009-2011, and Jakarta had just been
restored to investment grade after 14 years by two rating agencies.
The glow faded fast.
Now, investors are shying away from its bonds and shares as the case
for piling more money into Southeast Asia’s biggest and fastest-growing economy
has weakened. Indonesia still has plenty of positives. Growth held up better
than that of peers when Europe’s debt crisis intensified. A bounty of natural
resources and an expanding middle class provide the foundation for continued
growth.
But recently, confusion over economic policy has chased foreign money
away. Foreign investors have cut their holdings of government bonds on fears of
inflation from a potential 33 percent hike in local fuel prices.
Some economists have questioned the wisdom of a series of interest rate
cuts since late last year. This means there will be extra attention on a
central bank policy meeting on Thursday. It comes two days after a bond auction
drew a weak response, resulting in sales of about one-third of what the
government targeted.
That was in stark contrast to the last two auctions, which drew robust
demand. All 14 analysts polled by Reuters believe Bank Indonesia (BI) will hold
its benchmark overnight rate at its record low 5.75 percent.
Widely Diverging Views
There have been widely diverging views on BI’s strategy. On Feb. 20,
Citigroup said it expected more rate cuts, based on indications from BI that
inflation would remain under control.
Nomura had forecast a 25 basis point cut on Thursday, but on Tuesday changed
to hold and said it expects BI to soon “shift its policy bias from supporting
growth to controlling potential second-round effects from the inflation shock.”
In January last year, annual inflation hit a 21-month high of 7
percent. That led some funds to exit, and spurred BI to make its only rate
increase in 2011, by 25 basis points to 6.75 percent. The inflation rate has
been falling, and last month was a 22-month low of 3.6 percent. With inflation
in check and worries growing about Europe denting growth, BI cut its rate 75
bps in late 2011 and another 25 bps in February.
In the past month, high oil prices have revived inflation concerns.
President Susilo Bambang Yudhoyono has said the government must cut its
spending on subsidizing local oil prices, and in late February, submitted two
options to Parliament for putting in rises.
The government has raised its 2012 inflation forecast to 7 percent from
5.3 percent, according to a document seen by Reuters on Wednesday.
Higher inflation threatens to hit domestic consumption — the
cornerstone around which most Indonesia-focused portfolios are constructed.
That’s why some funds feel relative valuations for Indonesian stocks versus the
rest of Southeast Asia and other emerging markets are looking rich.
‘Already Expensive’
“People see that valuations are already expensive amid uncertainties of
expectations on the fuel price hike. We have reduced long positions,” said
Herbie Mohede, a fund manager in Jakarta at PT Samuel Aset Manajemen, which
manages about $130 million in Indonesian stocks and bonds. Indonesia grew 6.5
percent in 2011, the fastest in 15 years.
But if inflation this year is 7 percent, that would top growth, seen at
6.1 percent in a Reuters poll.
“We expect growth to remain in trend, although a moderation to possibly
below 6 percent is already due to happen because of the extended slowdown in
the global economy,” said Gundy Cahyadi, an economist at OCBC in Singapore.
When fund managers returned to emerging markets following the post-Lehman
Brothers shakeout, Indonesia found itself front-and-centre on their screens. In
2010, the Jakarta stock market’s benchmark soared 46 percent.
Good economic fundamentals contributed to the upgrades of Indonesia’s
sovereign debt, on junk status since the 1997-98 Asian financial crisis, by
Fitch Ratings in December and Moody’s Investors Service in January.
Foreign Inflows
The stock exchange has seen foreign inflows of $183 million in the year
up to March 2, a fraction of the $2.65 billion for all of 2011, according to
Reuters data.
Also, Indonesian equity funds did not see net inflows in the two weeks
ending Feb. 24 despite emerging markets as a group receiving solid flows over
the period, according to JPMorgan. The index is up just 3 percent this year
compared with the 10.3 percent rise in Asian stocks outside Japan.
Southeast Asia’s top performer this year has been the small Vietnam
market, up 26 percent.
Jakarta’s top consumption-driven companies have fared even worse, with
Unilever Indonesia flat so far this year and the main auto assembler Astra
International down 6.6 percent.
Fuel subsidies protect local consumers from rising global oil prices,
but at the same time Morgan Stanley notes that Indonesia could see a
deterioration in its fiscal balances if the government does not allow domestic
fuel prices to rise.
Given this difficult backdrop, Indonesian markets are likely to remain
relative underperformer among emerging markets. The yield on benchmark 10-year
Indonesian government bonds has risen about 80 basis points since falling to a
record low around 5 percent on Feb 9.
Rupiah Weakens
The rupiah lost about 0.5 percent on Wednesday was off 1.2 percent this
year, according to Thomson Reuters data, as it was hit by capital outflows.
Considering the amount of money that has found its way into the country
in recent years, the unwind could have some way to go, making Indonesia an
underperformer in Asia for a while.
US-based money manager Cumberland Advisors, which invests in emerging
markets primarily via exchange-traded funds, said in an emailed note to clients
on Feb. 27 that it had sold its positions in Indonesia while adding to Brazil
and India and maintaining “significant” positions in China. Cumberland’s move
comes largely due to valuations.
On a forward 12-month price-to-earnings basis, the MSCI Indonesia
trades at a multiple of 13 times, according to Thomson Reuters I/B/E/S. That
represents a 26 premium over the MSCI Emerging Markets index and a 36.4 percent
premium to the MSCI China index.
“While some of the premium for Indonesian stocks is justified, current
valuations do look to us to be too rich,” said Bill Witherell, Cumberland’s
chief global economist.
Aditya Suharmoko and Vikram Subhedar
The Jakarta Globe
Reuters
Business & Investment Opportunities
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