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Analysis: Indonesia's bulls are happy about the late-but-better-than-never rate hike

Image: Reuters  Berita 24 English -- Indonesia's first interest rate hike in four years made its central bank one of the last to stop us...

Image: Reuters 

Berita 24 English -- Indonesia's first interest rate hike in four years made its central bank one of the last to stop using money settings from the time of the pandemic. This gave investors a reason to stay optimistic about one of the world's most stable emerging markets.

Bank Indonesia raised its benchmark interest rate on Tuesday because inflationary pressures were getting stronger. This came as a surprise to most analysts because Governor Perry Warjiyo had said less than a week before that there was no need to tighten.

Warjiyo called the rate hike "pre-emptive," and it comes after months of the central bank talking down inflation. This made some investors worry that policymakers were not taking risks seriously enough and relied too much on price controls.

Alex Wolf, head of investment strategy for Asia at J.P. Morgan Private Bank, said about the fast pace of inflationary pressures around the world, "I don't know if I would call it a relief, but you're seeing maybe some lessons learned from the experiences around the rest of the world."

Wolf says that Indonesia is a country in Asia that "we prefer" because it has strong domestic demand and good trade terms that will help it grow.

Other investors also liked the rate hike because it gave them confidence that policymakers are aware of the risks and are taking care of them. The fact that growth expectations were raised also made people feel better.

The rupiah went up and is now 1.2% higher than its lows in July. It is more stable than its peers, even though MSCI's broadest index of emerging market currencies is near a six-week low.

Stocks and bonds have also gone up. The Jakarta Composite Index has stayed the same this week and is up 9% this year, while most other markets have gone down a lot more.

Since June, when it reached a high of 7.544%, the yield on Indonesia's benchmark 10-year bond has dropped by almost 50 basis points. Even though high-yield sovereign spreads grew in general this year, the gap against U.S. Treasuries has also shrunk.

Citi changed its strategic view from "underweight" to "neutral" on Tuesday. Even Credit Suisse is happy.

Suresh Tantia, a senior investment strategist at Credit Suisse in Singapore, said, "As long as earnings estimates for the next 12 months continue to go up, we feel good about our positive view."

"The likely slow pace of tightening, compared to most of the rest of the region, could be a big help for portfolio inflows in the near future."


This year, the rush to raise rates around the world and the rise of the dollar have made emerging markets uncomfortable. However, rising commodity prices and fewer foreigners holding bonds on the market have helped Indonesia's economy and limited the damage.

Indonesia's relative outperformance stands in contrast to times in the past when its economy and finances were unstable. This has helped shake off some of its reputation as a weak and vulnerable emerging market.

"(BI) has kept the rupiah stable so far, which is great," said Lavanya Venkateswaran, an economist at Mizuho Bank. However, she is worried that inflation could get out of hand.

Last week, President Joko Widodo hinted that the cost of fuel subsidies, which is $34 billion this year, can't be kept up. This shows how much pressure there is on gasoline prices.

When asked about the possible increase in fuel prices, Warjiyo said that BI would update its inflation forecast to match the government's policy on subsidies. Any more drops in the prices of commodities or shaky domestic demand are also risks.

But so far, markets seem happy to back policymakers, and besides the currency, bonds are the best way to show how nervous investors are.

Yields have stayed the same, but foreigners now own about 15.6% of the market, which is the lowest share since 2009.

It has had a small effect on Indonesia's foreign exchange reserves, which dropped to $132,2 billion in July. However, they are still enough to cover imports for 6.2 months, which is much more than the international standard of three months.

"We think the risk of capital flight is lower because (foreign) holdings are already low," Goldman Sachs analysts wrote in a note on Wednesday, recommending shorting the Philippine peso against the Indonesian rupiah.

"Now that BI is on a path to raise rates, we think this will help the currency and, by extension, the local currency bonds, since BI still has a higher interest rate than the U.S."

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