20180102-大华银行-Indonesia__Whither_Financial_Assets_In_2018__5页_346kb

Indonesia: Whither Financial Assets In 2018?

Core Content Overview

In 2017, Indonesia's financial asset markets showed strong performance, with notable gains in the stock market, declining bond yields, and a relatively stable rupiah (IDR). These positive outcomes were attributed to a more resilient economy, improved policies, and better coordination among policymakers. The World Bank and Fitch recognized these improvements, with the former upgrading Indonesia's Ease of Doing Business ranking and the latter raising Indonesia's credit rating to BBB.

Key Improvements in 2017

• Stock Market: Achieved a 20% gain for the year, with the JCI index reaching a record high of 6,355.65.
• Bond Yields: 10Y Indonesian government bond yield dropped by 165.4 bps, from 7.973% to 6.319%.
• Currency Stability: IDR depreciated only 0.7% against the USD, similar to the Philippines peso (PHP).
• Current Account Deficit: Narrowed significantly, indicating improved external balance.
• Exports: Increased in October, suggesting a recovery in export performance.
• International Reserves: Remained strong, contributing to financial stability.
• Ease of Doing Business: Improved by 19 places, reaching 72nd position.
• Fitch Rating: Upgraded Indonesia's investment grade to BBB from BBB–.

Economic Outlook for 2018

• GDP Growth: UOBI forecasts 5.3% growth in 2018, up from 5.1% in 2017.
• Growth Drivers: Regional elections, Asian Games, and continuous infrastructure spending.
• Global Prospects: IMF upgraded global GDP growth forecast to 3.7% for 2018.
• Consumer Confidence: Remains guarded, with cautious optimism expected for 2018.

Inflation and Interest Rates

• Inflation Forecast: Expected to rise from 3.8% in 2017 to 4.2% in 2018.
• Interest Rates: UOBI anticipates a 25 bps rate hike in December 2018, bringing the BI rate to 4.50% from 4.25%.
• Inflation Target Range: Forecast is near the upper end of the official 2.5–4.5% range.

Financial Asset Outlook

• Equity Market: Expected to perform well due to stronger growth and inflation, with potential for continued gains.
• Bond Market: Likely to underperform, as yields are expected to remain compressed and yield differentials with the US are narrowing.
• Rupiah (IDR): Expected to benefit from the improved external position, though depreciation risks persist due to yield differentials and potential external shocks.

Correlation Analysis

• Equity vs. IDR: Inversely correlated, with a statistically significant negative relationship.
• Indonesian Equity vs. MSCI EM Index: JCI tends to outperform the broader MSCI Emerging Market Equity Index.
• IDR vs. EM Currencies: Shows a loose correlation, indicating that IDR performance is more influenced by domestic factors.

Risks to Watch in 2018

• External Risks:
  • Limited positive spillover from US economic growth.
  • Weaker exports due to China's shift to domestic-driven growth.
  • Capital outflows and tighter financial conditions from US monetary policy normalization.
  • Geopolitical tensions, such as those in the Korean peninsula and South China Sea.
• Domestic Risks:
  • Sustained slowing of private consumption.
  • Political uncertainty due to regional and general elections.
  • Delays in private sector capital expenditure.
  • Elevated nonperforming loans (NPLs) in the banking sector.

Conclusion

Indonesian financial assets are expected to remain supported in 2018, particularly the equity market, due to stronger economic growth and inflation. However, the bond market may face challenges due to narrowing yield differentials and potential external shocks. The IDR is likely to remain stable, though depreciation risks cannot be ignored. Maintaining a sound monetary and fiscal policy mix, along with a strong external position, will be crucial in managing these risks effectively.