What's happening in Indonesia these days
Despite the strong structural growth story of Indonesia, investors are getting nervous. We believe some correction would be healthy and advise potential investors to wait for this process to finish first.
In yesterday's surprisingly large move, the IDR weakened nearly 3% intraday against USD from 8700 to as high as 8940, before recovering back towards the 8,800 level. The move appeared to be driven by a sharp sell-off in Iocal government bonds, with 10year IDR rates selling off by as much as 40 bps to 7.2% (or 10% higher than 2 weeks ago). Bank Indonesia's Deputy Governor Sarwono said the central bank "intervened
in the rupiah and bond markets" as it needed to calm the market and doesn’t want the currency to fall further. In addition, the relatively heavier positioning of Indonesian local government bonds by foreign investors at 36% (highest amongst the rest of Asian local government bonds) means that IDR bonds are in for further volatilitiy ahead.On a positive note, the Indonesian government had earlier this year appointed 13 stateowned enterprises to form a bond-stabilisation fund, which can be used to purchase government bonds in the event of disorderly market conditions. Regarding equities, we keep our view that weakness is likely to continue
for now as both high valuations and a difficult technical picture imply a correction. Clearly, Indonesia boasts among the best structural growth outlooks in Asia though. Long term investors can hold on to positions, those looking to enter the market with new money should wait for somewhat better entry levels.
dated 16 September 2011
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