It seems clear now how market conditions will be until the end of the year. Two important foreign issues - the US Federal Reserve's tapering of quantitative easing (QE3) as well as the US debt ceiling issue which resulted in a shutdown as the Democrats and Republicans failed to come to an agreement on the country's federal budget - and various economic data from Indonesia (inflation and the trade balance) have provided some more insight into the matter. I will discuss each topic one by one below.
Speculation about an end of the Federal Reserve's monthly USD $85 billion bond-buying program (QE3) had dramatic consequences for emerging markets in recent months. However, at the last FOMC meeting, the Fed decided to continue the program. Although it remains unknown when and how the program will come to an end, I believe that this will not happen in 2013. As a result, foreign capital inflows into Indonesia's capital markets are most likely to occur for the remainder of the year. However, as QE3 will come to an end someday, these new money flows can be labeled 'hot money' and may be pulled out quickly from Indonesia when the tapering begins.
Then there is the debt ceiling issue which resulted in a (temporary) shutdown. On the one hand, this issue is able to disturb the global economy. However, remembering that the presence of political uncertainty tends to bring negative effects on investments, it also implies opportunities. Especially in emerging economies such as Indonesia. Normally equity flows to (relatively) safe investment destinations. The current unstable political context in the USA brings along negative market sentiments which can be seen in the depreciating US dollar after the shutdown. On 17 October is the deadline of the debt ceiling. If this deadline is not met, then the USA will default.
If we take a closer look at conditions in Indonesia, we see an improving economic situation. Yesterday (01/10), Statistics Indonesia released positive economic figures. In September 2013, Indonesia posted the highest deflation rate (0.35 percent) since 2001. September's deflation was triggered by easing food prices as well as easing prices of communication and financial services. Currently, calender year inflation reached 7.57 percent, while the inflation figure stands at 8.40 percent year-on-year. The September deflation figure is well-received by market participants as the country has been hit by high inflation numbers in recent months. It also implies that Bank Indonesia can keep its benchmark interest rate (BI Rate) at 7.25 percent as the discrepancy between the inflation rate and the BI rate eased.
Another important figure involves Indonesia's trade balance. In August 2013, Indonesia posted a USD $0.13 billion trade surplus which represents a marked improvement from July's USD $2.33 billion deficit. However, it is important to note the weakening of the country's non oil & gas exports. For the first time this year, these non oil & gas exports fell to USD $10.39 billion. Imports also fell (to USD $9.36 billion). In sum, it means that Indonesia now has a trade deficit of USD 5.54 billion and it will be important to continue minimizing this deficit through spurring exports.
Lastly, there is the HSBC Purchasing Manager Index. For Indonesia this index rose to 50.2 in September 2013 (from 48.5 in the previous month). This is a very good result as an outcome above 50 indicates an expanding manufacturing sector. It is expected that the figure will remain above the 50 in the months ahead because there is ongoing expansion in the country's manufacturing sector, particularly in the car industry as the government has provided incentives for the establishment of the Low Cost Green Car (LCGC) industry.
The aforementioned issues can be reasons to (re)enter Indonesian markets. I still have not revised my target level of the IHSG (Indonesia's benchmark stock index) at 4,500 points. Currently, the index is around 4,400 points, thus I expect the entry of (short-term) foreign inflows.
Currently, interesting sectors are Indonesia's automotive sector, consumption sector and banking sector. The automotive sector is interesting as the LCGC-industry is obliged to use spare parts and components that are manufactured in Indonesia. Moreover, the price of a LCGC is relatively cheap and thus demand for the car will be high. On the downside, the LCGC industry will burden the already fragile state of Indonesia's infrastructure and burden the trade deficit as fuel demand may rise due to more cars hitting the roads (giving rise to more oil imports). The consumption sector is still supported by Indonesians' increasing purchasing power, while the banking sector will benefit of some new regulations of Bank Indonesia that foresee more financial stability. These regulations include the higher minimum secondary statutory reserves-requirement and the higher minimum down payments in the real estate sector as the central bank feared a property bubble.