Indonesian Stock Index May Rise 20% on Sovereign Rating Upgrade, BNP Says

Indonesia’s benchmark stock index may rise 20 percent within a year on an expected upgrade of the nation’s sovereign debt rating to investment grade, according to BNP Paribas. 

A re-rating of Indonesia’s debt will have “far-reaching implications in interest-rate structure, currency, investments and, ultimately, asset prices and valuations,” analyst Elvira Tjandrawinata wrote in a report today, rating Indonesian shares “overweight.” BNP set a 12-month target of 4,500 for the Jakarta Composite index, with recommendations including PT Astra International and PT Bank Mandiri. 

Faster economic growth and record-low interest rates helped the Jakarta Composite gain 48 percent this year, the best performance among Asia’s 10 biggest markets. The index is trading at 18 times estimated earnings, the highest level since December 2007. Moody’s Investors Service said Dec. 1 it may upgrade Indonesia’s credit rating, citing economic “resilience” and sustained macroeconomic “balance.” 

“Despite outperforming its peers in the region this year, we do not believe that the benefits of the re-rating have been fully priced in,” Tjandrawinata said. “Other catalysts could include a continued pickup in investments, which would feed into consumption, making it stronger and more sustainable.” 

Record Low

Southeast Asia’s biggest economy may expand as much as 6.5 percent in 2011 from an estimated 6 percent this year, the central bank said on Dec. 6. Bank Indonesia has kept its key interest rate at a record low of 6.5 percent for 16 months, helping companies such as Astra, Indonesia’s biggest automotive retailer, boost sales. The Jakarta Composite index rose 0.9 percent to 3,754.91 as of the 12 p.m. local time break. 

Indonesia and other Asian nations face “significant headwinds” from inflation in the first half and a “difficult absolute-returns environment until inflation and interest rates peak in mid-2011,” Jonathan Garner, Morgan Stanley’s Hong Kong- based chief Asian and emerging-market strategist, said Dec. 1. 

Indonesia’s consumer price index in November gained 6.33 percent from a year earlier, the central statistics office said Dec. 1. That compares with a 5.98 percent median forecast of economists in a Bloomberg News survey. Inflationary pressure will probably continue next year, Bank Indonesia Governor Darmin Nasution said. 

Moody’s and Standard & Poor’s Ratings Services both rate Indonesia two levels below investment grade, with a positive outlook, while Fitch Ratings has the country one step below. “We are convinced that the re-rating is on track,” BNP’s report said.Source: Bloomberg