Weekly Report 3 December 2007

4 12 2007

Weekly Outlook : The subdued inflation for November (+0.18 percent month-on-month) has created positive market sentiment. Hopes are that further rate cuts are possible provided that inflation can be reined in over the next few months. As such, stocks may edge higher this week with the JCI heading toward the 2,730 level. Yet longer-term there are some dark clouds on the horizon, with the prospect of the government adopting a policy to restrict supplies of subsidized fuel posing a major downside risk to stock prices.

Indonesian stocks climbed higher last week despite soaring crude oil prices. There were a number of supporting factors. First was the improved sentiment on Wall Street as well as on regional markets as investors surmised that the Fed would be forced to play its hand and cut rates in the future in order to avert economic weakness. And from the domestic side, concerns over the controversial ruling against Temasek eased as investors increasingly believe that the initial adverse market reaction was overdone. Stock wise, coal miners and CPO stocks continued to perform well. Hence, against this backdrop, the JCI put on an impressive head of steam last week, gaining103.98 points or 4.0 percent to 2,688.33.

In the last six years, Jakarta stocks have risen in every December: by 5.0% in 2006, by 6.8% in 2005, 2.4% in 2004, 12.0% in 2003, 8.8% in 2002 and 3.1% in 2001. But the market has been in a bullish trend in these years of course. Indeed, the JCI showed an average monthly return of 4.6% in 2006, 1.4% in 2005, 3.7% in 2004, 5.2% in 2003, 0.67% in 2002, and a negative 0.5% in 2001.

Government might limit Premium fuel sales According to news reports, the government is strongly considering the idea of whether to force all private motorists to switch to non-subsidized fuel (such as Pertamina’s Pertamax brand) from subsidized Premium petrol starting in January next year. To achieve this goal, the government would strictly limit supplies of Premium petrol. Thus, with limited availability of Premium fuel, motorists would have little choice but to switch to unsubsidized fuel brands. However, it is not clear how a workable mechanism could be devised to ensure that non-private motorists – such as operators of public transportation vehicles – would still be able to obtain premium fuel.

Indonesia’s automakers said last week that they would limit increases in car prices to only around 2-3 percent next year despite rising inflationary pressures. This, they say, is far below the level needed to take into account the impact of surging crude oil prices and other rising costs. According to the automakers it is not possible for them to raise prices too much given the elasticity of demand to hikes in selling prices. As such, automakers’ margins may be squeezed unless they can find other ways to slash costs (i.e. cutting marketing and advertising budgets etc). At the same time, the weak rupiah is also hurting automakers, pushing up the cost of raw materials. Indonesia Weekly Market Report 3 December 2007