Indonesia's benchmark stock index broke a record on Wednesday (25/10), closing at an all-time high. (Antara Photo/Akbar Nugroho Gumay)

Confidence Returns to Indonesia's Financial Markets


JANUARY 08, 2019

Jakarta. After a steep correction last year and pressure on the rupiah, Indonesia expects stability to return to its financial markets this year as foreign capital starts flowing back into the domestic market.

The first bond offerings of the year last week were more than three times oversubscribed, with interest mainly coming from foreign investors, who also bought more local stocks than what they sold over the past two weeks, reversing a net selling trend that persisted throughout last year, according to Indonesia Stock Exchange (IDX) data.

For Bank Indonesia Governor Perry Warjiyo, the return of foreign capital inflows came as no surprise.

The central bank has been aggressive in raising its benchmark interest rate – the seven-day reverse repo rate – which was increased by 175 basis points to 6 percent over the past nine months in response to tightening by the United States Federal Reserve.

As it now seems more likely that the US central bank may raise the federal funds rate only twice this year instead of three times, Indonesia's financial markets have become more attractive to foreign investors as a destination to park their funds.

"The US dollar is not king anymore this year," Perry said during a meeting with editors of the country's largest media groups on Monday.

Pressure on the rupiah has also eased. The currency currently trades at 14,031 to the greenback, having appreciated 8 percent from its weakest level of 15,253 four months ago, Bank Indonesia data showed.

Bank Indonesia took measures in concert with the central banks of Malaysia and Thailand on Jan. 2 to reduce dependency on the dollar in bilateral trade. The arrangement will involve Indonesian trade with the two countries, which amounts to about $33 billion per year, being settled in the countries' respective currencies, instead of the US dollar.

Indonesia's current-account deficit, the main culprit for the weakness in its currency, is expected to narrow to 2.5 percent of gross domestic product this year, compared with 3 percent last year.

American multinational investment bank Morgan Stanley said lower oil prices should help Indonesia lower its current-account deficit.

"With Brent down 36 percent from its September highs, we should see some relief on the trade balance, which has been weighing on the current account and, in turn, [become] a drag on confidence in equities and performance," analysts Sean Gardiner and Aarti Shah wrote in a recent note to clients.

They said oil prices, with the combined effects of the election stimulus, recovering loan growth, dovish monetary policy and rising company earnings have cemented Morgan Stanley's bullish views on Indonesian stocks.

The New York-based bank's top picks include conglomerate Astra International, state-owned gas utility company Perusahaan Gas Negara, state-owned telecommunications company Telkom Indonesia, and lenders Bank Central Asia and Bank Mandiri.

Bank Indonesia is confident that the country's economy may grow by between 5.0 percent and 5.4 percent this year, compared with an estimated 5.2 percent last year. Household consumption is also expected to expand by between 5.1 percent and 5.5 percent and investment by between 6.5 percent and 6.9 percent, the central bank governor said.

Perry said bank loans will maintain their expansive pace of 12 percent this year, in line with an increase of between 8 percent and 10 percent in third-party funds.

However, one source of concern this year is lower commodity prices, which will affect Indonesia's export earnings. Perry said the country should therefore increase its exports of manufactured goods, seek new markets for its products and encourage tourism.

He said Bank Indonesia is comfortable with its current policy and that it can afford to maintain its benchmark rate until March.

"We are optimistic that 2019 will be better than 2018," Perry said.