Executive director of equity research at JP Morgan Securities Indonesia Aditya Srinath painted a positive picture about the equity market in Indonesia despite the lingering risks emerging from domestic political instability and looming capital outflows due to higher US interest rates in the second quarter of 2015. Srinath stated that Indonesia’s economic resilience so far as well as falling domestic interest rates among Indonesian financial institutions are positive signs for the equity market.
The outlook for Indonesia’s equity market is positive as liquidity improves due to Indonesian commercial banks’ decision to cut deposit rates to lower cost of funds. However, Srinath emphasized that the current struggles between Indonesia’s legislative and executive branches can obstruct president-elect Joko Widodo’s reform programs as defeated (and vindictive) presidential candidate Prabowo Subianto secured a majority in Indonesia’s House of Representatives (DPR) and People’s Consultative Assembly (MPR). Capital outflows can also occur when the US Federal Reserve decides to raise its key interest rate. It is expected that emerging economies, including Indonesia, will feel the negative impact of higher US interest rates as funds will move back to the USA. Emerging economies that are particularly vulnerable to such capital outflows are those markets that show financial instabilities. Indonesia is one of these vulnerable countries as it has to cope with a wide current account deficit. Moreover, Indonesia's subsidized fuel prices are expected to be raised before the year-end. This will lead to accelerated inflation in Southeast Asia’s largest economy.
JP Morgan sees Indonesia’s banking, cement and property sectors as favourite stock choices.
Meanwhile, Standard & Poor’s Ratings Services - a global leading provider of credit ratings - said that the large Indonesian firms with large cash reserves could be shielded from risks such as a weakening Indonesian rupiah exchange rate, lack of domestic liquidity and political instability due to the hostilities between parliament and the government. These risks may erode credit quality in the next year according to S&P.
S&P’s credit analyst Xavier Jean stated that the largest Indonesian companies show more prudent financial balance sheets compared to those in Singapore, Thailand, and the Philippines. The subsequent large cash reserves form a buffer against the risks that Indonesia is currently facing. “The lack of a deep banking system and domestic capital markets in Indonesia and still high borrowing costs could also be making it difficult for these companies to raise debt, even if they wanted to,” Jean said.
Jean agrees with Srinath that the greatest risks that are faced by Indonesia are current politics and looming higher US interest rates. Therefore, Jean expects the rupiah to continue its weakening trend against the US dollar. Furthermore, Indonesia will see increased competition as the ASEAN Economic Community (AEC) will be implemented in late 2015. The AEC aims to enhance regional economic integration among the ASEAN member states. It will transform the ASEAN region into a region with free movement of goods, services, investment, skilled labour, and a freer flow of capital. According to Jean, Indonesia will specifically face increased competition in the light manufacturing and services sectors as these markets are still growing.
Research of S&P shows that 13 out of the 15 Indonesian companies it has reviewed have “moderate-to-low debt, steady cash flows from operations, manageable capital spending and large cash balances, which are consistent with characteristics of investment grade companies.”