BNIS Investment Outlook 2H18

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August 3, 2018 Stock No Comments

Indonesian economic growth had stayed positive during 2017, steadily recording around 5.1%, which is in fact relatively higher than the 2016 economic growth figure of 4.94%. This has been supported primary by expanded investment and exports, followed by government spending and domestic consumption.

The Government economic policy and the monetary policy of Bank Indonesia (BI) have effectively implemented action to accelerate economic activity. While not all economic policies have proved effective, it still managed to grow consistently over the last three years. The 2017 Indonesian trade balance showed a surplus, compared to that of 2016, while foreign reserves had risen to USD 130.2 billion in 2017.

Meanwhile, a relatively low inflation rate had allowed BI to maintain its low interest rate policy, to further stimulate economic growth. The JCI had been soaring meaningfully, increasing by almost 20.0%, reaching a level of 6356 in 2017. Domestic investors are actively investing in the stock market, even though their foreign counterparts currently assume a net sell position.

As of December 2017, foreign investor participation in the Indonesian stock market had declined to 51.30% from highs of 63.75% and 54.49% as of December 2015 and December 2016, correspondingly. In fact, most market participants apparently expect that the current favorable macroeconomic and capital market conditions can be sustained through 2018.

The first half of 2018 (1H18) was in fact a challenging period for Indonesian economic conditions, as both external and internal factors impacted on the overall Indonesia economy, such as 1) IDR currency was weakening against the USD, sinking past IDR 14,200 per USD;

The Bank Indonesia (BI) benchmark interest rate (7DRRR) hike of 100 bps to 5.25% from a previous 4.25% earlier in the year; 3) The Fed plans to be more aggressive, raising the benchmark interest rate four times this year instead of a previous market expectation of three raises; 4) The trade war between US and China, which might conceivably impact emerging market economies, including that of

Indonesia; 5) Political events and elections in Indonesia, which will be held simultaneously. These factors are predicted to slow Indonesia’s economic growth potential.

Therefore, we revise down our economic growth forecast to 5.16% from a previous 5.30% in 2018, due to a higher interest rate environment and weakening IDR currency against USD this year. However, improving commodities prices and higher exports are expected to increase the Indonesia trade balance surplus in 2018, although the nation did in fact record a trade balance deficit during 1H18. Moreover, foreign direct investment (FDI) in real sector is expected to grow, on the back of an improving investment climate.

In capital markets, particularly the equity market, many foreign investors have been pulling out, due to the depreciation of IDR against USD. However, in 2H18, we expect that foreigners may come again into Indonesia’s equity market,

once the IDR currency stabilizes against USD. Thus, we predict that JCI could even rise to a level of 6500 moderately this year, supported by the increasing capital inflow from investors who are interested in both real and financial sectors in 2018. Political events in Indonesia for the 2019 Presidential Election are expected to impart a positive sentiment to the market and raise confidence for

economy prospects.