Monthly Market Commentary - July 2021


The government has increased the PEN stimulus from IDR699tn to IDR745tn due to the implementation of the emergency PPKM. The increase mostly comes from social safety net by IDR34tn and healthcare spending by IDR21tn. The government will also expedite the realization of regional budget stimulus by issuing a decree to ease the bureaucracy and reallocation process. Budget deficit is still aimed at 5.7% of GDP for FY21 as the government will cut spending on corporate support by about IDR10tn while use budgets from other expenditures to help finance the increase in the PEN stimulus.

BKPM recorded 2Q21 FDI growth of 18.0%, strongest growth since 4Q15 and stronger than in 1Q21 at 12.5% YoY. The growth was driven by the base metal, transportation, telecommunication, warehousing, and utilities industry while Singapore was the major driver by country of origin. However, we saw continuing recovery on FDI from the US and Europe. The strong incoming FDI from the base metal industry boosted growth of FDI in East Indonesia. Meanwhile, DDI grew by 12.7% YoY, a recovery from -4.2% YoY in 1Q21. The DDI was driven by tertiary sector with base metal and pharmaceutical industries posting strong growth. Overall direct investments grew by 16.2% YoY in 2Q21.

Indonesia reported inflation of 0.08% MoM, or 1.52% YoY in July compared to 1.33% in June. Core inflation eased down from 1.49% YoY in June to 1.40% YoY in July due to high base effect from gold price. Food inflation was the main driver as crop prices pushed up overall inflation. Meanwhile, new academic year prompted increase in education inflation while higher demands for medicines due to the recent wave of COVID-19 pushed up healthcare inflation.

Trade balance in June was reported at a surplus of USD1.3bn, narrower from previous month due to stronger import growth. Exports rose by 54.5% YoY in June driven by oil and gas exports of 117.1% YoY as oil price remained strong during the month. Iron and steel as well as vehicles exports helped drove up manufacturing exports by 45.9% YoY in June. CPO exports eased down due to softening CPO price. Meanwhile, imports grew by 60.1% YoY in June driven by oil and gas imports as oil price has been strong while volume also picked up due to economic recovery. Capital goods imports also grew by 43.4% YoY in June. 

The Ministry of Finance reported fiscal deficit of 1.72% of GDP as of June. Revenue grew by 9.1% YoY. Tax revenue grew by 8.8% YoY with most items grew well across the board. Non-tax revenue grew by 11.4% YoY driven by stronger commodity price and external demand. Meanwhile, spending grew by 9.4% YoY with central government spending increased by 19.1% YoY due to vaccine spending, capital expenditures, and subsidies. In addition, PEN stimulus realization reached 37.2% of FY2021 target as of mid-July.

Forex reserve closed at USD137.1bn as of June, an increase from USD136.4bn in May due to global bonds issuance. Bank Indonesia maintained its policy rate at 3.50% in July. The central bank also revised some of its macro indicator targets. Bank Indonesia downgraded its FY2021 GDP growth forecast from 4.1-4.5% to 3.5-4.3% due to the second wave of COVID-19 in the past month. However, the central bank upgraded the global GDP growth forecast from 5.7% to 5.8% driven by recoveries in the US, Europe, and China as vaccine roll-out continued to progress well while global demand continued to improve. In addition, Bank Indonesia estimates 2021 CAD to be lower at 0.6%-1.3% compared to previous expectations at 1.0%-2.0% of GDP. Inflation target is maintained at 2.0-3.0% YoY. USD/IDR closed at IDR14,463/USD which appreciated by 0.3% MoM.


Local Market

JCI index remained volatile in July but managed to post positive return of 1.4% MoM. Foreign investors posted inflow during the month at USD67mn (IDR984bn) to the equity market. The index was quite resilient and relatively moving sideways during most time in the month despite the new wave of COVID-19 in Indonesia where cases, infection rates, and hospital bed occupancy rates reached new records. The government’s emergency PPKM also led to increase in the PEN stimulus aimed to boost vaccination and add social spending amidst the tighter mobility restriction. Despite the increase in stimulus, the Ministry of Finance maintained its fiscal deficit target at 5.7% of GDP for 2021 as they reallocated some budgets for the stimulus. Bank Indonesia downgraded its 2021 GDP growth forecast from 4.1-5.1% to 3.5-4.3% due to the emergency PPKM. We started to see improvements towards the end of the month as cases peaked at 57,000 cases in one day while vaccination pace jumped to about 850,000 shots per day at its peak. Hence, the government eased down the mobility restriction slowly to PPKM level 3-4. Indonesia also received batches of vaccine from Sinovac, Astra Zeneca, and Moderna during the month to combat the spread of the Delta variant. The Moderna vaccine will also be used by healthcare workers as booster shots to combat the Delta variant. Outside Indonesia, global equity investors were also concerned on the Delta variants as it spread across the globe. The US also started to see resurgence of COVID-19 cases due to the Delta variant despite high vaccination rate. The Fed stated that it needs time before conducting tapering as further improvements in employment data is needed which helped ease investors’ concern despite the US inflation booking another increase to 5.4% YoY in June. Investors were anticipating the next Fed meeting towards month end on whether any taper talks will be occurring. However, the Fed remained dovish with its policies and stated further improvements is needed before tapering can be done. Over in Asia, China’s crackdown on its technology and education sector caused market to jitter towards the end of the month as investors became more wary of risks of government intervention. Throughout the month, we continue to see rise in equity trading from retail investors which pursued digital proxy names. Investors are also anticipating the upcoming IPO of Bukalapak, which will be the first Indonesian unicorn company to be listed with ample size and liquidity.

The IDX Sector Technology was the winner again in July with a return of 9.6% MoM. EMTK continued its gain in July on the back of the upcoming Bukalapak IPO and partnership announcement with Grab. EMTK’s subsidiary, SCMA, also performed well as investors are optimistic on its platform and broadcasting of the Tokyo Olympics which would garner more subscribers. Meanwhile, investors are still upbeat on DMMX’s position in digital marketing and advertising as the company formed a JV with Hong Kong based SmartRetail. Top 5 drivers were: EMTK (+10.0%), DMMX (+98.7%), TFAS (+99.1%), NFCX (+57.8%), and MTDL (+20.1%).

Global Market

The US market posted solid returns as inflation concerns subsided while vaccination progress, government stimulus, and overall reopening helped support the economy. DJIA 34,502.5 (+1.25%); S&P 500 4,395.3 (+2.3%); NASDAQ 14,672.7 (+1.2%). The US reported 2Q21 GDP growth of 6.5% driven by private consumption. Meanwhile, the Fed has not given clear indication on when it will start to do tapering as well as the pace it plans for. Officials mentioned that they will only consider raising rate if the labor market has reached full employment and inflation reach 2% or higher.

The Asian markets were under pressure in July due to the resurgence of COVID-19 cases and the spread of the Delta variant across the region. NIKKEI 27,283.6 (-5.2%); Hang Seng 25,961.0 (-9.9%); Shanghai Comp 3,397.4 (-5.4%); Straits Times 3,166.9 (+1.2%); FTSE Malay KLCI 1,494.6 (-2.5%); KOSPI 3,202.3 (-2.9%). In addition, Chinese equities saw major sell-off due to recent tightening measures in China’s private sectors by the government. China’s manufacturing PMI fell to 50.4 in July from 50.9 in June which may imply a slowdown in China’s recovery.

The European markets mostly closed positive in July on the back of reopening and solid vaccination progress. FTSE 100 7,032.3 (-0.1%); CAC 40 6,612.8 (+1.6%); DAX 15,544.4 (+0.1%). However, investors are starting to grow concerned on the spread of the Delta variant across the region which may be a potential hurdle ahead. Eurozone PMI jumped to 60.6 in July from 59.5 in June as the economy continued to recover. The Euro Zone also posted 2% QoQ GDP growth in 2Q21 driven by Portugal, Latvia, and Austria. Meanwhile, the ECB maintained its accommodative monetary policies and maintained its policy rate and asset purchases.

Equity Outlook and Strategy 

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. However, we must remain cautious and make sure that the condition does not worsen again.

Given the recent spread of Delta variant worldwide including in the US, we think that governments and central banks will continue to be accommodative with monetary policies. Hence, we think that this should also buy time before the Fed can actually conduct tapering. In the last FOMC meeting, the Fed maintained its policy rate and asset purchases while mentioned that it needs to see further progress of recovery before conducting tapering. Meanwhile, recent emergency PPKM has caused the Indonesian government to reallocate budget to increase in national economic recovery (PEN) stimulus. In the same time, the government is going all out to try lower the budget deficit to meet the target of 3% by 2023. Hence, we need to monitor the government’s stance and fiscal plans to assess impact on growth at this juncture. One additional risk we need to monitor is the Chinese government’s current policies as they are under spotlight at the moment after recent crackdown on its private sectors which caused investors to jitter.

We continue to see improvements in the investment space as a result of recovering global demand and sentiments. FDI continued to grow in 2Q21 and beat the growth in 1Q21. We are seeing strong investment growth coming in from the base metal industry as the government continue to push investments into the battery and metal industry. Moreover, we are seeing continuous improvements in FDI coming from western countries as their economy has been recovering post pandemic. We think that this should give a strong steppingstone for incoming foreign investments while there may be upcoming boosters coming from the implementation of the Omnibus Law and INA. Meanwhile, the first tech unicorn IPO in Indonesia, Bukalapak, is also hoped to attract more foreign flows coming into the market with more technology companies planning to go public in the coming months in Indonesia. The development in the Indonesia technology sector is hoped to spur demand from foreign investors and boost up weighting of the Indonesia equity market among global peers.

Fixed Income

The bond market posted positive performance in July as the 10-year government bond yield fell from 6.560% to 6.290%. Foreign investors booked net outflow of USD592mn from the bond market in July. The large outflow was due to a bond that matured in mid-July. Hence, if we stripped out the large outflow in the one-day, foreign investors still booked net positive flows in July. Despite the new wave of COVID-19 in Indonesia the bond market remained resilient. The market sentiments improved as the Fed indicated that it is not ready to conduct tapering while investors are seeing signs of easing US inflation. The US Treasury yield fell from 1.47% to 1.23% while the USD denominated Indonesian 10-year yield (INDON31) closed at 2.14% at the end of July. The bond market started the month flat as cases of COVID-19 soared to new records which led to concerns among investors. The government implemented the emergency PPKM and increased the PEN stimulus to combat impacts of the new wave of infection though its fiscal deficit target is maintained at 5.7% of GDP for FY2021 as budget reallocation is chosen to finance the stimulus. The market then turned positive as the US unemployment rate went up to 5.9% and prompted the Fed to state that it is not ready to start tapering. Easing US inflation pressure also gave positive sentiments to the bond market though investors were surprised that June inflation was still booked at a high 5.4% YoY. China’s PBOC also indicated more accommodative monetary policy which gave further positive sentiments. The Ministry of Finance also indicated that it may lower financing needs due to lower budget deficit expectations and utilization of excess budget. Meanwhile, we are seeing continuing improvements in the government bond auction demand. flush liquidity continued to give supports to the bond market. Bank Indonesia maintained its policy rate at 3.50% and downgraded its FY2021 GDP growth forecast from 4.1%-5.1% to 3.5%%-4.3% YoY. The central bank now estimates CAD to be narrower at 0.6%-1.4% of GDP from 1.0%-2.0% of GDP previously. Inflation target is maintained at 2.0-3.0% YoY. Investors were also anticipating more updates from the Fed regarding potential tapering talks towards the end of the month. However, the Fed maintained its dovish policies and kept rates and asset purchases unchanged while mentioned that it will still need to see further progress in terms of recovery before conducting tapering.

In terms of issuance, the government continued to see improvements in auction demand during the month. As of July, the government managed to issue about IDR838.7tn of bonds YTD. All-in-all, YTD bond issuance has reached 67% of the government’s FY2021 issuance target. As of end of July, foreign ownership of IDR government bond has reached IDR965.6tn, or 22.3% of total outstanding amount.

Fixed Income Outlook and Strategy 

We expect the US inflation to peak soon and should ease the US Treasury yield’s volatility though we expect limited upside in the market at this juncture due to lack of catalysts. 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. As we are seeing improvements in the current COVID-19 wave in Indonesia, we think that volatility should ease as long as the condition does not worsen. Meanwhile, the government maintained its budget deficit target at 5.7% of GDP for FY2021 as the additional PEN stimulus will be financed by budget reallocation. We continue to prefer the short-to-medium tenor series due to higher demand at the current level. We think that low foreign ownership of government bonds at about 23% would limit downsides in the bond market while high real yield and low inflation continues to attract foreign investors. Additionally, the government’s plans to trim down issuance would also help reduce supply risks.

In the last FOMC meeting, the Fed maintained its policy rate and asset purchases program. Hence, we think as the Fed continue to be dovish, there should be more time before it starts to do tapering. The Fed mentioned that it will need to see further improvements in recovery especially employment data before conducting tapering. Moreover, as the Delta variant started to spread further in the US, we think that the Fed along with the US government   would need to continue to be accommodative to support the economy. Additional stimulus and printing of money would also put further pressure on the USD which would be positive for EM currencies. The risk is on China’s current crackdown in its private sectors which spurred investors’ concerns.

Meanwhile, the government is on the spotlight to improve its fiscal balance as recent emergency PPKM increased its fiscal spending needs. Though rating agencies are maintaining their sovereign ratings on Indonesia, they are closely monitoring further development with the fiscal balance and expect the deficit to return below 3% by 2023. Hence, the government’s all out push for revenues and spending cut would need to be monitored especially during recovery times from the COVID-19 pandemic. We think the fiscal headwinds would be among the major domestic noises in the bond market.



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