Monthly Market Commentary - August 2021

Macroeconomics

The government has officially announced the draft for the 2022 state budget or RAPBN 2022. The budget draft focuses on healthcare and social reforms as well as developments in digital and green infrastructure on top of the ongoing macro agendas. The budget draft implies a deficit of 4.85% of GDP in 2022, a decline from the government’s target of 5.82% in 2021 and in-line with the plan to reduce the deficit below 3% by 2023. Meanwhile, GDP growth is estimated at 5.0-5.5% YoY in 2022 based on the budget draft. Revenue is aimed to grow by 6% YoY driven by 9% YoY tax revenue growth while spending is targeted relatively flat at 0.4% YoY. The budget draft is currently being discussed with the parliament which will take about two months to be finalized. Hence, we should expect the official budget to be out around October.

Bank Indonesia stated that it plans to continue its burden sharing scheme with the government and buy a maximum amount of about IDR224tn in 2022 compared to the maximum amount of IDR215tn in 2021. Up to IDR58tn in 2H21 and USD40tn in 2022 will cost BI an interest equivalent to 3 months reverse repo rate. The proceeds of the bonds whose interests are covered by Bank Indonesia will be used to finance vaccination and COVID-19 healthcare related expenses.

Indonesia reported 2Q21 GDP growth of 7.1% YoY compared to -0.7% YoY in 1Q21. A strong rebound driven by domestic demand which reached 94% of pre-covid level. Domestic demand jumped by 6.6% YoY from -1.3% YoY. Private consumption grew by 5.9% YoY compared to -2.2% YoY in 1Q21 driven by leisure and service-related consumptions as mobility was strong as a result of improving COVID-19 conditions in the quarter. Government incentives and fiscal stimulus also helped consumption. Meanwhile, government expenditure grew by 8.1% YoY compared to 2.3% YoY in 1Q21. As seen from strong direct investment figures, investments posted growth of 7.5% YoY in 2Q21 from -0.2% YoY in 1Q21. Net exports continued to be strong at 34.9% YoY in 2Q21.

Indonesia reported 2Q21 balance of payment deficit of USD0.4bn compared to a surplus of USD4.1bn in 1Q21. CAD widened from 0.4% of GDP in 1Q21 to 0.8% of GDP in 2Q21. As trade balance remained a surplus, the wider CAD was driven more due to deeper primary account deficit as a result of seasonality, recovery, and higher dividend repatriation. Service deficit also widened due to higher freight costs. Meanwhile, the financial account reported a surplus of USD1.9bn in 2Q21 compared to USD5.5bn in 1Q21, a decline due to higher total net loan repayments and easing portfolio investment surplus from the equity and corporate bond side.

Indonesia reported August inflation at 1.59% YoY or 0.03% MoM, a pick-up from 1.52% YoY in July. The inflation was driven by education related inflation as the new academic year has started. Healthcare inflation stabilized due to ease down in COVID-19 conditions in Indonesia. On the other hand, food prices posted deflation trend in August due to lower chili and chicken prices. Core inflation fell from 1.40% YoY in July to 1.31% YoY in August due to weaker domestic demand amidst the stricter mobility restrictions.

Trade balance was reported at another surplus of USD2.6bn in July compared to USD1.3bn in June. Export growth eased down from 54.5% YoY in June to 29.3% YoY in July due to slower iron and steel export growth to China as the country trimmed down industrial production. CPO exports improved, on the hand, due to stronger price and increasing demand from India post reopening. Import growth also slowed down from 60.1% YoY in June to 44.4% YoY in July. Capital goods imports decelerated to 5.4% YoY from 43.4% YoY in June while slower oil price growth also dragged down overall imports growth. Meanwhile, pharmaceutical imports still grew strong by 420% YoY driven by vaccine and medicine imports.

The Ministry of Finance reported fiscal deficit of 2.04% of GDP as of July. Revenue grew by 11.8% YoY. Tax revenue grew by 11.0% YoY driven by oil and gas tax revenue and VAT. Non-tax revenue grew by 15.9% YoY driven by non-oil and gas revenue. Meanwhile, spending grew by 9.3% YoY with central government spending increased by 20.1% YoY due to material and capital expenditures. In addition, PEN stimulus realization reached 43.9% of FY2021 target as of end of August.

Forex reserve closed at USD137.3bn as of July, a slight increase from USD137.1bn in June. Bank Indonesia maintained its policy rate at 3.50% in August. The central bank believes that potential impact from the Fed’s tapering would be manageable due to the Fed’s better communication, BI’s triple intervention and attractive interest rate differential, and ample of forex reserve. Bank Indonesia stated that it will continue to do QE and buy BI borned interest government bond with a maximum amount of about IDR40tn in 2022 compared to the maximum amount of IDR58tn in 2021. The proceeds of the bonds whose interests are covered by Bank Indonesia will be used to finance vaccination and COVID-19 healthcare related expenses. USD/IDR closed at IDR14,268/USD which appreciated by 1.4% MoM.

Equity

Local Market

JCI index remained volatile in August but managed to post positive return of 1.3% MoM. Foreign investors posted inflow during the month at USD313mn (IDR4.5tn) to the equity market. The market started the month strong as investors were excited for the IPO of Bukalapak, the first tech unicorn listed in Indonesia. Moreover, the regulatory crackdown in China’s tech sector also brought some flows over to EM including Indonesia. The easing US Treasury yield helped gave support to the Rupiah and the equity market as well. In the same time we are seeing significant improvements in Indonesia’s COVID-19 conditions as daily new cases passed its peak and now have fallen to about 10,000 cases per day with nationwide positivity rate of 10%. Jakarta saw strong improvements as positivity rate fell to 5% while hospital bed occupancy rate has also fallen to about 40% nationwide. Vaccination pace in Indonesia reached 1.1mn as of August as Indonesia received batches of vaccines from Sinovac, Astra Zeneca, Sinopharm, Moderna, and Pfizer. During the month, the US’ FDA also announced that it is giving full authorization for the Pfizer vaccine with an efficacy rate of 91%. The Ministry of Health is estimating Indonesia to reach herd immunity by the end of the year as about 430mn doses of vaccine are scheduled to arrive by year end. Indonesia also reported its 2Q21 GDP growth of 7.07% YoY as recovery was shown across the board during the quarter. The strong GDP growth was expected, but market is estimating the growth to ease in 3Q21 due to the second wave of COVID-19 in Indonesia. Market faced headwinds as the index faced pressure due to sell down in tech proxy names in the middle of the month which is driven by panic selling and profit taking mainly by retail investors. In addition, equity market regionally was also hit by minutes of the Fed’s latest FOMC meeting which seems to indicate that the Fed officials are leaning towards possible taper announcement during the November FOMC meeting. Investors concerned were raised when the US’ July employment data came out strong which is one of the justifications needed by the Fed to start tightening policies. Bank Indonesia during its monthly meeting maintained its policy rate at 3.50% and stated that it thinks that Fed tapering’s impact should be more manageable now compared to back in 2013. The government also announced the 2022 state budget draft which aims to lower budget deficit back below 3% by 2023. However, the budget would leave limited fiscal room to push for growth next year. Towards the end of the month, the market faced noises on Bank Indonesia’s independence due to the planned continuation of the burden sharing scheme with the government.

IDX Sector Industrials was the winner in August with a return of 7.4% MoM driven by sector heavyweight ASII. Strong improvement in Indonesia’s COVID-19 conditions helped boost investors’ confidence on the nation’s macroeconomic recovery which is viewed as positive for ASII. Cheap valuation and continuous Government supports on the luxury tax discounts for 4-wheelers made the stock even more attractive for investors to bottom-fish. Top 5 drivers were: ASII (+10.7%), UNTR (+2.7%), BHIT (+26.4%), IMPC (+6.0%), and BMTR (+7.6%).

Global Market

The US market had another strong month despite concerns on the Delta variant and potential Fed tapering plans. DJIA 35,360.7 (+1.22%); S&P 500 4,522.7 (+2.9%); NASDAQ 15,259.2 (+4.0%). The Fed’s Jackson Hole symposium ended with another dovish statement from the Fed as no timing was given out for tapering other than the possibility of doing it by the end of the year. Chairman Powell mentioned that the resurgence of COVID-19 in the US led policymakers to believe to not rush in terms of tightening monetary policies. Investors are also eyeing on developments in Afghanistan as President Biden ended the two decades military operations in the country leading to takeover by the Taliban. The US and its allies must now regroup to assess on their approach with the Taliban.

The Asian markets reported another mixed result due to the spread of the Delta variant and weaker PMI data across the region. NIKKEI 28,089.5 (+2.95%); Hang Seng 25,878.99 (-0.3%); Shanghai Comp 3,543.9 (+4.3%); Straits Times 3,055.1 (-3.5%); FTSE Malay KLCI 1,601.4 (+7.1%); KOSPI 3,199.3 (-0.1%). The average PMI for Taiwan, South Korea, Indonesia, Malaysia, Thailand, and the Philippines fell from 48.2 in July to 47.4 in August. China’s manufacturing PMI continued to fall in August at 50.1 from 50.4 in July due to the Delta variant. The Bank of Korea became the first major Asian central bank to hike policy rate by 25bps to 0.75% in August due to concerns on financial risks. The South Korean central bank hinted that there will be more rate hikes ahead.    

The European markets posted another strong month as well. FTSE 100 7,119.7 (+1.2%); CAC 40 6,680.2 (+1.0%); DAX 15,835.1 (+1.9%). Stronger macro data and improving investor sentiment on the back of economy reopening and fast vaccine roll-out was the driver of the market. Despite so, investors are starting to get worried on the spread of the Delta variant in the region.

Equity Outlook and Strategy 

We remained positive on equities for long term as valuation compared to peer equity markets remains attractive while the fundamental reform story remains intact. Potential listings of new economy stocks in the second half of the year would also help attract flow into the equity market. We will continue to be vigilant in the short term and monitor the COVID-19 conditions in Indonesia. We are seeing improvements and decline in daily new cases, infection rates, and hospital bed occupancy rates while the government plans to gradually ease mobility restrictions. Improving conditions would be a booster for the equity market. However, we must remain cautious and make sure that the condition does not worsen again.

Looking at the recent 2022 state budget draft, the government is ambitious in trying to bring down the budget deficit back below 3% by 2023. Hence, the government plans to push for revenues including tax revenue. Hence, equity investors would want to be cautious on the government’s stance in terms of tax reform and policies in the coming months and years. Moreover, current fiscal space offers limited room for the government to help push growth through its policies which may pose as risk for the equity market.

In addition, the Fed’s statements in regard to tapering remain ambiguous as the central bank has not given precise timing of tapering after the Jackson Hole symposium. However, Chairman Powell mentioned that tapering will likely to happen by year end while recent resurgence of COVID-19 in the US should give time for the Fed to think more before executing tapering.

Fixed Income

The bond market posted positive performance in August as the 10-year government bond yield fell from 6.290% to 6.064%. Foreign investors booked net inflow of USD1bn into the bond market in August. The market was supported by improving COVID-19 conditions in Indonesia while the 2022 state budget draft looks favorable for the bond market as it aims to lower budget deficit. However, the market was hit due to sentiments from the Fed whose officials seem to lean towards taper announcement during the November FOMC meeting. The US Treasury yield rose from 1.23% to 1.31% while the USD denominated Indonesian 10-year yield (INDON31) closed at 2.13% at the end of August.

The bond market started the month strong due to easing US Treasury yield and stronger Rupiah. Moreover, auction demand continued to be strong and may prompt Bank Indonesia to reduce its participation. The government has also officially cut the income tax on bond interests for foreign taxpayers from 20% to 10% while the tax cut plan for local investors is still being reviewed. Meanwhile, the government reported strong 2Q21 GDP growth of 7.07% YoY driven by domestic demand. However, investors are anticipating weaker 3Q21 GDP growth due to the second wave of COVID-19. Additionally, investors are getting worried on possible early tapering as the US employment data in July showed strong figures.

On the last Fed FOMC meeting, officials seem to lean towards possible taper announcement by the November meeting according to the minutes. Hence, causing investors to be concerned and pressured the bond market. Meanwhile, Indonesia reported another trade surplus in July of USD2.6bn as imports slowed down again. Hence, investors’ expectations on CAD may also remain benign. The 2022 state budget draft was announced which is sensible and conservative. The budget draft is positive for the bond market as it aims for lowering budget deficit to 4.85% of GDP in 2022 which is in-line with the government’s target to bring down deficit below 3% by 2023. This would also help reduce risk of sovereign rating downgrade. Meanwhile, Bank Indonesia maintained its policy rate at 3.50% and mentioned that it believes that Fed tapering impact should be more manageable this time around. Bank Indonesia mentioned that it will continue the burden sharing scheme with the government in 2022. The proceeds will be used to finance vaccination and healthcare related expenses.

In terms of issuance, the government continued to see solid auction demand during the month. As of August, the government managed to issue about IDR950.9tn of bonds YTD. All-in-all, YTD bond issuance has reached 66.6% of the government’s FY2021 issuance target. As of end of August, foreign ownership of IDR government bond has reached IDR979.2tn, or 22.4% of total outstanding amount.

Fixed Income Outlook and Strategy 

We are neutral to slightly overweight in terms of view and duration strategy for fixed income as we expect the US inflation to have peaked and should ease the US Treasury yield’s volatility though we expect limited upside in the market at this juncture due to tight valuation. In addition, investors are also following closely the development of the Fed’s upcoming policies and any updates on potential tapering. Hence, we would need to closely monitor these issues in the following weeks.

Improving COVID-19 conditions in Indonesia helps to improve foreign investors’ appetite for IndoGB. Assuming conditions continue to improve, we expect Indonesia to post a recovery in economic growth following the second wave of COVID-19 in June to August. Moreover, recent Bank Indonesia’s burden sharing plans with the government does cause noises on the central bank’s independence, however, it would also further increase liquidity in the banking system. In addition, the Fed remained dovish in terms of policies at the recent Jackson Hole symposium which gives time before it conducts tapering. We continue to believe that current Indonesia external macro position should put the country in a more defensive mode against tapering compared to back in 2013. The bond market also rides along the developments in the equity market and saw solid foreign inflow during the month which we expect to continue.

Disclaimer

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