Indonesian Stocks Rally to Slow on Interest-Rate Concerns, Citigroup Says

A rally that helped Indonesian stocks enter a bull market may slow this quarter as faster inflation spurs concern the central bank will raise borrowing costs, according to Citigroup Inc. 

The Jakarta Composite index has climbed 17 percent this year, the best performer among Asia’s 10 biggest markets, as record-low interest rates accelerated growth in Southeast Asia’s largest economy and boosted earnings. Bank Indonesia kept its main interest rate unchanged for a 12th month today, even as inflation accelerated at its quickest pace in 15 months. 

“The risk is that Bank Indonesia sees the threat from inflation as persistent and they raise interest rates,” Alex Wreksoremboko, head of research at PT Citigroup Securities Indonesia, said in an interview in Jakarta before today’s central bank decision. 

The Jakarta Composite fell 0.2 percent to 2,968.1 at 1:52 p.m. The gauge lost 2.8 percent yesterday, the most since May 25, as faster-than-expected gains in consumer prices in July drove speculation that the central bank would bring forward rate increases.

Bank Indonesia kept its reference rate at 6.5 percent, it said in a statement in Jakarta today. All 22 economists in a Bloomberg News survey had expected the decision. The measure is at the lowest level since its introduction in July 2005. 

Food Prices

Indonesia has refrained from following Asian economies from India to Australia in raising rates this year as President Susilo Bambang Yudhoyono targets average annual economic growth of 6.6 percent. 

The central bank said Aug. 2 it needs closer coordination with the government to keep food prices “reasonable” after bad weather affected supply and pushed inflation higher in July. 

Consumer prices rose 6.22 percent last month from a year earlier, the Central Bureau of Statistics said this week. That’s higher than the 5.05 percent gain in June and 5.73 percent median increase expected by economists in a Bloomberg survey. 

“Inflationary pressures will persist given accommodative monetary conditions,” Anthony Nafte, an economist at CLSA Asia- Pacific Markets, wrote in a note yesterday. “It is time that Bank Indonesia demonstrated its commitment to contain inflation expectations which requires that it hikes its policy rate by 25 basis points to 6.75 percent at its policy meeting” today. 

Consumer prices may climb in a range of 5.8 percent to 6 percent this year, Bank Indonesia Deputy Governor Hartadi Sarwono said July 20.

Bull Market

The rally in stocks may resume after the release of companies’ third-quarter earnings in October, Wreksoremboko said. He expects the Jakarta index to rise to around 3,400 points by the end of the year. That’s a 14 percent gain from yesterday’s close.

The benchmark gauge was the first in Asia to enter a bull market since the peak of the European debt crisis in May after climbing 20 percent from this year’s low. Faster growth helped boost profit at companies including PT Citra Marga Nusaphala Persada, a toll-road operator, and PT Indocement Tunggal Prakarsa, a cement producer. 

Shares of PT Indofood Sukses Makmur, the nation’s largest instant noodle maker, may rise because demand for its food products is less affected by inflation, Wreksoremboko said. 

Instant noodles are Indonesia’s second-biggest staple food after rice. PT Astra Agro Lestari, a plantations company, may also gain as the price of the commodity increases, he said. 

“The market will start looking at fundamentals and realize that, yes, there is an inflationary threat but that is not significant enough to derail corporate earnings growth,” said Wreksoremboko. “Aside from inflation, all the other parameters are positive for market sentiment.”Source: Bloomberg