Weekly Report – April 30 2007

Weekly Outlook: Attention this week may turn back to domestic inflation with the announcement of April’s inflation figure on Tuesday. In this regard, we are forecasting deflation of 0.02%. Other factors are also positive. Investment is picking up. Liquidity is high and demand for equities is strong. As such, the JCI may be able to stay above the 2,000 level this week. On the currency front, the rupiah is likely to remain firm and hover around 9,100 to the greenback.

The JCI breaks through the 2,000 level. A memorable week for Indonesian stocks as the JCI breaks through the 2,000 level for the first time in its history. Newsflow is positive with encouraging 1Q07 earnings by banks in particular boosting sentiment. Lending growth is accelerating as interest rates come down, stimulating the economy. Deposit rates at some major banks have now been slashed to below 7%. The latest banks to report better performance are micro lending specialist Bank Rakyat Indonesia (BRI), Bank Danamon and Permata Bank. For BRI, for example, its loan book grew 19 percent to Rp 91 trillion in 1Q07. Bank Danamon, meanwhile, saw a 92 percent surge in after-tax profits on an 18 percent increase in its loan book to Rp 43.1 trillion as of the end of March. Loans growth at Permata Bank reached 7 percent, bringing its loan book up to Rp 23.8 trillion as of the end of March. Besides banks, mining stocks remain in the spotlight on the back of high commodity prices. Bullish regional sentiment and news that the Dow stormed through the 13,000 level has added to the positive sentiment. Over the week, the JCI ended up 50.95 points at 2,019.68. Average daily trading value reached Rp4.4 trillion, again showing strong appetite for stocks, while foreign buying on the JSX reached Rp2 trillion over the week.

US stocks retain their upward momentum. Strong corporate results continued to boost market sentiment in the US. Last week it was the turn of 3M and Boeing to come up with strong first quarter results. M&A activity continued to help boost market sentiment. Such deals raised confidence among investors that share prices are still at attractive levels, helping investors to shrug off concerns over the rather uncertain prospects for the US economy. Economic expansion in the US is slowing, with GDP growth reaching only 1.3 percent (annualized) in the first quarter of this year. This is down significantly from the 2.5 percent growth rate in the fourth quarter of last year. All major stock market indices gained ground over the week. The DJIA added 1.2 percent to 13,120.94, while the broader Standard & Poor’s 500 Index rose 0.7 percent to 1494.07. The tech heavy Nasdaq Composite Index climbed 1.2 percent to 2557.21, its highest level since February 2001.

Sentiment on the JSX should remain positive this week. Attention this week may turn back to domestic inflation with the announcement of April’s inflation figure on Tuesday. In this regard, we are forecasting month-on-month deflation of 0.02%, with the year-on-year inflation rate falling to 6.45%. If this forecast turns out to be accurate, and there is indeed deflation, it should pave the way for the central bank to cut interest rates further even though BI had previously opted to keep its benchmark interest rate unchanged at 9.00 percent. We have discussed the reasons for BI’s cautious stance in this regard before, and believe that BI does not have to worry about creating excessively strong domestic demand in the economy:unemployment levels are still very high after all. Such a prospect of more rate cuts would boost confidence in the stock market further since lower interest rates are an important catalyst for brisker economic growth – historical data shows that the economy tends to move up a gear when interest rates are below the 10 percent level. Indeed, our latest report entitled “Slower-than-Expected Growth in 2007?” provides compelling evidence that Indonesia’s economy is clearly on an expansionary path despite some concerns of a lethargic economy in the first quarter of 2007.

Beetween a rock and a hard place

The issue of a cabinet reshuffle has come into the spotlight again after Vice President Jusuf Kalla spoke on the matter during an extraordinary consultation meeting in Yogyakarta last Friday. In fact, Golkar has actually demanded a reshuffle since the end of last year. At that time, Golkar’s Deputy General Chairman and the Speaker of Parliament, Agung Laksono, put forward the names of 15 cadres of his party to fill 10 positions in the cabinet. Golkar feels its stance is reasonable. After all, it holds more seats in parliament than any other party (23%) and yet still only has three cabinet posts.

And Golkar’s demands have intensified following the results of some surveys that reveal that the popularity of the President and the Golkar party is on the wane. Indeed, Megawati’s PDIP is now reportedly more popular than Golkar since higher food prices – in particular rice – have increased economic hardship for many. Golkar also believes that a cabinet reshuffle is necessary given the poor health of some of the current ministers.

The issue of a reshuffle is a hot commodity in Indonesia. During Golkar’s National Leadership Meeting in October 2006, 22 of the 33 regions proposed that Golkar withdraw its support for the government. Such calls came after the President established a Presidential Working Unit for the Management of Programs and Reform (UKP3R) without apparently any consultation with Vice President Jusuf Kalla.

And it appears that Golkar is once again seeking a cabinet reshuffle. This time, however, it is seemingly trying to use the interpellation move regarding the government’s support of the UN Security Council’s resolution on Iran as its ace card. Some Golkar members have called on the President to reshuffle the Cabinet by April 21 at the latest, trying to put pressure on the President as the interpellation issue will be decided during the plenary session on May 6.

Over the last two weeks, President Soesilo Bambang Yudhoyono (SBY) has unfortunately given mixed signals in regard to the issue of a cabinet reshuffle. Indeed, the President has not even confirmed that he would reshuffle the cabinet. On April 15 he dismissed calls for a cabinet reshuffle, saying this would only disrupt the government’s work. In this regard it seems SBY is too calculating in his efforts to secure his power. He does not realize that from the people’s perspective, his excessively cautious style is one of the reasons for the people’s disappointment after his promise to be more resolute and decisive. Download the full report.

Is the Series of Interest Rate Cuts Over ?

The Indonesian central bank stopped lowering interest rates in its monthly meeting in early April for a number of reasons: possible further price increases in the coming months; rising inflationary expectations; the fact that inflation has remained persistently high; and worries that adding a monetary stimulus to the economy would only have a limited impact on growth while, at the same time, triggering higher inflation.

Currently the Indonesian long-term inflation rate is around 6 percent. With the impact of the fuel price hikes removed from the inflation data, the current long-term inflation rate is stable at around 6 percent. As such, the perception that inflation is likely to stay at a relatively higher level in the near future is not accurate we believe.

Inflation expectations are abating. dRi’s consumer survey suggests that the increase in price pressures that started to occur in December pushed up consumers’ inflation expectations. But as the harvesting season got underway, however, consumer expectations on prices started to fall in February 2007.

Growth is still below its potential level. Our calculations suggest that the long-term potential growth rate for the Indonesian economy is around 6.7 percent. Job creation at this growth rate is just enough to absorb new job seekers. Thus, as long as the economy grows below 6.7 percent, it is very unlikely that we would see persistent price pressure from the demand side.

The economy still needs a stimulus. Some signs of weaknesses in the Indonesian economy have emerged since December 2006. The readings from the Consumer Confidence Index and the Coincident Economic Index suggest that the current economic conditions might not be as strong as the central bank had previously thought. As such, additional stimuli from the monetary side would not cause the economy to overheat we believe. Download the full report.

Indonesian Market Commentary – 23 April 2007

Market sentiment is likely to remain upbeat on the JSX this week and the JCI should move higher. A break above 2,000 is not out of the question. Overall newsflow is largely positive and hopes of stronger investment growth should encourage investors. Upbeat regional markets and a bullish Wall Street are providing another pillar for the market’s strength. Liquidity is also strong. Meanwhile, on the domestic political front, news of an impending cabinet reshuffle may just be enough to reverse the growing consumer pessimism in the government.

Jakarta stocks extend their gains. Stocks listed on the JSX remained on their upward trajectory last week, with the JCI ending the week up 27.578 points at a record closing high of 1,968.73. Among the sectors, banking stocks continued to show their strength as lower interest rates are expected to lead to a conducive business environment for banks and stronger profitability going forward. Deposit rates at some major banks have now been slashed to below 7%. A minor setback was seen on Thursday as profit takers emerged on a regional correction after news of breakneck economic growth in China of 11.1% percent in 1Q07 suggested that that country’s economy was overheating. But such fears were quickly vanquished and stocks on the JSX rebounded strongly on Friday as regional markets recovered. Average daily trading value reached Rp3.8 trillion, again showing strong appetite for stocks, while foreign buying on the JSX reached Rp736.01 billion over the week.

US stocks retain their upward momentum. Strong corporate results continued to boost market sentiment in the US. Last week it was the turn of Honeywell International Inc., Caterpillar Inc. and JPMorgan Chase & Co. to come up with better-than-expected first quarter results. At the same time, economic data that suggested inflation was being well contained added to the positive sentiment: interest rate cuts a more likely prospect than before later in the year. Against this backdrop, all major stock market indices gained ground over the week. The DJIA added 2.8 percent to 12,961.98, while the broader Standard & Poor’s 500 Index rose 2.2 percent to 1484.35. The tech heavy Nasdaq Composite Index climbed 2.2 percent to 2526.39, its highest level since February 2001.

Sentiment on the JSX should remain positive this week. Market sentiment is likely to remain upbeat on the JSX this week and the JCI should move higher. A break above 2,000 is not out of the question. Overall newsflow is largely positive and hopes of stronger investment growth should encourage investors. Recent data confirms this to be the case with realized foreign direct investment (FDI) in Q1 2007 up 15 percent y-o-y. And looking forward, some large projects seem set to get off the ground. Upbeat regional markets and a bullish Wall Street are providing another pillar for the market’s strength. Liquidity is also strong and demand for equities is high. Of interest is that foreign investors are continuing to pour money into hedge funds, some of which seek to explore the opportunities available in emerging markets – particularly in Asia – given the region’s strong economic growth prospects. China is leading the way, as Asian countries’ trade dependency with the US declines. And in Indonesia’s case, it is able to leverage on its strengths as a country rich in natural resources at a time of buoyant commodity prices coupled with the brisk regional growth. A potent mix indeed. Download the full report.

Deflation ?

In March 2007, the consumer price index (CPI) rose 0.24% MoM (month-on-month), after its 0.62% MoM rise in February 2007. As such, the YoY (year-on-year) inflation rate edged up from 6.30% in February to 6.52% in March.

Prices rose in all components of the CPI. The highest increase was posted in the clothing component (up by 0.41% MoM), followed by the processed foods component (up 0.36%), the housing component (up by 0.29% MoM), the medical care component (up 0.20% MoM), the foodstuffs component (up 0.16% MoM), the transportation component (up 0.09% MoM), and the education component (up 0.03% MoM).

The March inflation figure is higher than we had first expected. Initially, we had expected deflation in March (before we revised up our forecast in the middle of the month), mainly on the back of government intervention in the rice market. By making efforts to ensuring an adequate supply of rice to the domestic market – through rice imports – the government had hoped to get rice prices under control. But because of limited stocks of rice in their warehouses, the government’s efforts were not as successful as we had first expected. As a result, deflation did not occur in March. Nevertheless, rice prices did decline to some extent, thereby limiting inflation in the foodstuffs component in that month. As a result, prices in the foodstuffs component only rose by 0.16 percent in March, or significantly lower than the 0.84 percent increase in February.

Looking ahead, we still expect seasonality factors to put downward pressures on prices in April. The harvesting season will peak in April, exerting further downward pressure on rice prices. As such, we expect the monthly inflation figure to be lower in April than in March. And considering that rice prices have not fallen significantly from their level in December, the likelihood is high that rice prices will fall sharply in April, thereby giving rise to overall deflation. Get the full report.