Monthly Market Commentary
Monthly Market Commentary
July 2018 reported 0.28% inflation, translated to annual inflation of 3.18% YoY (vs. 3.12% in June), inline to consensus expectation. Raw food contributed significant portion to the monthly inflation as chicken egg and broiler chicken meat alone contributed 0.15% to the monthly inflation. The rising chicken prices can be partly explained by the shrinking supply due to import quota on grand-parent stock enacted mid last-year. In addition, the increasing core inflation in July of 2.87% YoY (vs. 2.72% in June) was not exactly backed by improving demand, but it was because of rising broiler chicken egg prices due to supply issues.
Bank Indonesia (BI) maintain the 7-Days Reverse Repo Rate (7DRRR) unchanged at 5.25% in July after several rounds of monetary tightening in the previous months that saw the 7DRRR increased by 100bps year-to-date. The Central Bank thinks that the current rate is competitive enough to provide room for foreign capital inflow, as evidenced in the USD 633mn and USD 54mn inflow to bond and equity markets in July, respectively. In addition, BI also mentioned that they are preparing several policies to support liquidity further by 1) introducing a new benchmark for overnight rate called “Indonia” that will be based on real transaction; and 2) re-issue the SBI (Bank Indonesia Certificate) with maturities of 9 and 12 months. In regards to SBI, the market views it as additional risk to volatility given high foreign participants in the past, before it was deactivated.
On the fiscal budget, total revenue grew by 16% yoy in the first-semester of 2018, strongest growth since 2011, as it was driven by strong non-tax revenue (+21.0% YoY) and modest tax revenue (+14.2% YoY). The strength in non-tax revenue was driven by strong commodity prices, while tax revenue growth was driven by increasing compliance as well increasing earnings from commodity related companies. The same could not be said for expenditure, where total expenditure only grew by 5.7% on a yearly basis as government shifted their spending towards energy subsidy while letting capital expenditure spending contracted. This re-affirmed the government’s emphasis to maintain stability over economic growth, as budget deficit reached 0.74% of GDP in first semester and primary fiscal balance stayed in positive territory in the past 3 months. June trade surplus of USD 1.7bn came much higher than consensus estimate of USD 968mn. The high surplus was due to seasonal factor, where volume of imports slipped amidst the long-Lebaran holiday, causing overall imports growth slowed down to 12.7% YoY, from 29.1% YoY in May. As for export, despite a slight easing in growth during June, exports volume continued to gain momentum since March, suggesting an improving external demand.
JCI rebounded strongly in July with 2.4% gain as it broke the monthly-loss streak since February 2018. Despite the monetary tightening and slightly weaker Rupiah, JCI managed to gain on the back of net foreign inflows that was recorded at IDR 790bn (USD54mn) during the month. Recent flux of inflows might be caused by the jittery confidence in China market on trade-war risk, causing investors to try diversifying their risk from China market into EM countries, including Indonesia. All in all, the market gain was trimmed a bit during month-closing as most second-quarter earnings releases came below consensus. Sector-wise, mining came out as the best performer in July with 9.8% monthly gain despite the rollercoaster ride for the industry on the back of uncertainty in coal’s Domestic Market Obligation (DMO) regulation. Miscellaneous industry came second best with 6% monthly gain. The worst performer of the month was the Trade, Services and Investment sector with 1.8% monthly loss.
The pressure on foreign sell-off has subsided as they turned net buyer albeit still small. However Rupiah stability remains the key for investors to enter the Indonesian market.
2Q-18 GDP posts the highest growth since 4Q-13, growing at 5.27% (vs. 5.1% of consensus’ forecast) up from 5.06% recorded in 1Q-18, mainly driven by private and government expenditure at 5.14%. The improved private consumption was partly supported by the significant government expenditure growth at 5.26% in 2Q-18, the big push on social spending which supported purchasing power, activities during the period of Ramadan and regional election.
We have not seen much catalyst on the corporate earnings growth. The reported 2Q results were on the weak side as corporates faced cost pressure from USD, basic materials, and operational cost. While at the same time the revenue growth is slowing down due to weak purchasing power and competition. Hence, the net profit growth is very modest. The realised EPS growth in the 1H-2018 is 4%, while analyst expectation of earnings growth for FY18 is 10%, hence there is downside risk on the streets earnings forecast. Encouragingly, we see trend of consumption recovery on certain categories like motorcycles, fashion and foods. However, the consumption recovery is not broad based. The sectors with good results are banking, poultry, commodities and retailers, while most other sectors are soft like consumers, telecommunication, cement, construction and property.
The Indonesia bond market stabilized in July 2018, with 10-year benchmark yield (FR64) relatively unchanged at 7.7% level. Foreign investors started returning to the local currency bonds, and ownership in IDR bonds increased by IDR 9.1tn. It represented 37.7% of total bond outstanding (compared to 37.79% in June). Rupiah remained under pressure, but it started stabilizing and only depreciated by 0.59% to 14,414 during the month.
Domestic macro situation remained supportive for bond market stability.
Globally, investors still pay attention to US interest rate direction. The FOMC upgraded its assessment of the rate of economic activity from solid to strong, as domestic demand showed strong pace in the second quarter. On the other hand, President Trump made a comment that he was not thrilled with the interest rate hikes. Meanwhile, trade tensions between US and China continued with additional tariffs being imposed on each other’s imported goods.
By the end of July, the government has issued IDR 520tn of bonds or around 63% of gross issuance target in 2018, assuming budget deficit at 2.19% of GDP. The target has been revised lower, due to higher tax revenue collection and unused cash balance. The government still has room to issue global bonds, as it only accounted for 17% of gross issuance so far, compared to the average of 21% between 2015 and 2017.
Outlook and Strategy
We still see sentiments in emerging markets and concern on emerging market currencies to continue driving the bond market.
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