Monthly Market Commentary - June 2021


The Ministry of Finance announced plans for tax reforms in order to boost the government revenue and bring down the budget deficit back below 3% by 2023. VAT was proposed to be raise from 10% to 12%. The government is also considering adding a new layer for the income tax bracket where individuals earning above IDR5bn per year will be charged 35% income tax. Another round of tax amnesty is also being considered with lower fee rate than the one is 2016-2017. Carbon tax of IDR75/kg CO2e was also proposed by the government. The tax reform is currently being discussed and will need approval from the parliament before being passed.

Indonesia reported deflation of -0.16% MoM or 1.33% YoY inflation in June, a slowdown from 1.68% in May. Core inflation rose from 1.37% YoY in May to 1.49% YoY in June which shows improving domestic demand. Food and transportation deflation were the causes of the MoM deflation which was driven by high base effect from the Lebaran festive period in May. Food prices such as chili and red onion drove down food inflation while normalizing airfares and intercity transportation costs also caused the deflation.

Trade balance in May was recorded at a surplus of USD2.4bn, slightly larger than the surplus of USD2.3bn in April. Export grew strong by 58.8% YoY in May driven by commodities and manufactured goods. Commodity exports coming from CPO, coal, rubber, and copper jumped by more than 75% YoY in May while manufactured goods such as iron and steel, electronics, and vehicles posted an average growth of 95% YoY. Export destinations also expanded beyond China as exports to the US, Europe, and other Asian countries showed recoveries. Meanwhile, imports grew by 68.7% YoY in May in which all categories showed recoveries. Oil imports were among the main drivers as oil price remain strong while volume also picked up.

As of May 2021, the budget deficit has reached 1.32% of GDP. Revenue grew by 9.3% YoY driven by VAT, which grew by 10.9% YoY supported by low base effect from last year and stronger domestic demand, as well as international trade duty, which posted stellar growth of 65% YoY. Non-tax revenue also grew strong by 22.4% YoY due to strong commodity prices. Meanwhile, government expenditure grew by 12.1% YoY as central government spending still posted strong growth of 21% YoY, which indicates continuing front load spending. Vaccine related spending and capital spending were among the drivers for central government spending. Social spending fell by 9.4% YoY due to normalizing of the National Health Insurance (JKN) program. As of mid of June, the PEN stimulus realization has reached 32.4% of the government’s FY21 target. Tax incentives posted the highest realization of 63.5% of FY21 target.

Forex reserve closed at USD137.1bn as of June, an increase from USD136.4bn in May due to government’s external debt withdrawal and global bonds issuance. Bank Indonesia maintained its policy rate at 3.50% in June. Bank Indonesia also mentioned that should there be any pickup in inflation, the central bank would prioritize cutting down its asset purchases first before conducting any rate hikes. Bank Indonesia expects inflation to pick up in 1Q22 at the earliest. USD/IDR closed at IDR14,500/USD which depreciated by 1.5% MoM.


Local Market

JCI index’s return was flattish in June and recorded slight positive return of 0.6% MoM. Foreign investors posted inflow during the month at USD344mn (IDR4.9tn) to the equity market. The index continued its upward trend from the end of May driven by foreign inflow as well as the return of retail investors. Despite concerns on the trajectories of the US inflation and the Fed’s upcoming statements, foreign investors flocked into the Indonesia equity market as the market is a laggard compared to peers. Retail investors also returned in driving mid-to-small cap names while overall investors are also chasing names that are proxy to the digital economy. Strong commodity price also were among the positive drivers of market sentiment as oil price reached USD74/bbl while coal price reached over USD120/mt. Volatility then hit the market when the US announced its May inflation of over 5% while the Fed hinted two rate hikes in 2023 and possible tapering discussion soon. However, during the FOMC meeting, the Fed still maintained its rates and asset purchases while mentioning that it will need to continue to see high inflation and improvements in employment data before tapering is justified. Meanwhile, towards the end of the month, President Biden reached agreement with Bipartisan senators for USD579bn streamlined infrastructure stimulus as part of the total USD1.2tn, a lower number from previously at USD2.3tn. Market’s volatility continued as Indonesia’s COVID-19 cases spiked up as delayed impacts from the Lebaran holiday manifested itself. Nationwide infection rate jumped to 22% while Jakarta’s infection rate also spiked to 37%. Daily new cases also broke new record at 21,807 towards the end of the month. Hospital bed occupancy rate jumped to 74% nationwide and 92% in Jakarta. The government implemented stricter mobility restrictions especially in Jakarta. The new emergency PPKM will be implemented in Java and Bali on 3-20 July with 100% work from home policy for non-essential sectors, temporary closure of shopping malls, and no dine-ins at restaurants with take-outs allowed until 8pm. Despite so, market remained resilient and was not severely pressured as we believe that foreign investors’ position in Indonesia is already light while local investors have already positioned itself against the COVID-19 spike risk as they posted net sell in the end of May when the Lebaran holiday ended. In terms of vaccination, the government pushed its pace as it now targets for 1mn shots per day by August to curb the spread of infection. Vaccination pace improved from 330,000 shots per day in May to 821,000 shots per day by the end of June. The government also hit a new record of 1.3mn shots per day at the end of June. The increase was supported by arrival of new batches of vaccines, start of vaccination for people ages 18 and above in Jakarta, Vaksin Gotong Royong roll-out, and new vaccination spots including the converted police and army facilities. The government expects vaccine from Pfizer to arrive in August in phases as it has secured a total of 50mn doses. In addition, BPOM has also allowed vaccination for children ages 12-17 using Sinovac vaccine. Outside of Indonesia more countries such as the UK, Thailand, and Australia are also seen putting stricter mobility restrictions due to resurgence of COVID-19 cases.

The IDX Sector Technology was the winner again in June with a return of 182.2% MoM as the Indonesian tech sector continues to gain traction driven by the comeback of retail investors. During the month, data center companies such as DCII and EDGE were the main drivers as increasing internet usage is driving up data demand and, hence, benefit data centers. Moreover, foreign investments into data centers in the country also helped give positive sentiments. Top 5 drivers were: DCII (+329.1%), EDGE (+151.8%), MLPT (+181.1%), ATIC (+180.7%), and DMMX (+27.9%).

Global Market

The US market overall recorded positive return in June on the back of stronger employment data and housing numbers. DJIA 34,502.5 (-0.1%); S&P 500 4,297.5 (+2.2%); NASDAQ 14,503.9 (+5.5%). Moreover, the US’ May manufacturing PMI number continued to climb to 62.1 from 60.5 in the previous month. During the month, the Fed gave out a hawkish statement which prompted the market to expect tapering to come sooner than later. As the US has been consistently posting high inflation, market is expecting interest rate to normalized faster than in Europe and Japan. In the meantime, President Biden reached an agreement with the bipartisan senators on the USD579bn infrastructure stimulus, which is a smaller size from previous announcement by the President.

The Asian markets were mostly in red in the month of June due to spread of new variants of COVID-19 in the region following India. NIKKEI 28,791.5 (-0.2%); Hang Seng 28,827.9 (-1.1%); Shanghai Comp 3,591.2 (-0.7%); Straits Times 3,130.5 (-1.1%); FTSE Malay KLCI 1,532.6 (-3.2%); KOSPI 3,296.7 (+2.9%).The new wave of infections also brought some of the governments to reimplement stricter mobility restrictions in their respective countries, and hence, caused investors to concern on potential growth recovery slowdown. China’s manufacturing PMI fell from 51.0 in May to 50.9 in June.

The European market continued to record positive returns in June on the back of economy reopening and rapid vaccination. FTSE 100 7,037.5 (+0.2%); CAC 40 6,507.8 (+0.9%); DAX 15,531.0 (+0.7%). The EU is now seeing lower infections while mobility restrictions are slowly being lifted, and hence, pushing economic activities. Meanwhile, the ECB maintained its asset purchase pace and may revise its inflation target.

Equity Outlook and Strategy 

At this juncture, there are two issues that may pressure the market or cause volatility and, thus, need to be monitored. The first issue is the resurgence of COVID-19 in Indonesia. Currently, infection rate in Indonesia has reached about 23% nationwide while Jakarta’s infection rate has reached about 40%. The condition is comparable to the last peak post year-end holiday in January. Hospital bed occupancy rate is another concerning point as Jakarta’s bed occupancy rate has reached 90%. Despite so, we have not seen significant market pressure as foreign investors still posting slight inflow into Indonesia while locals have already sold down position since late May.

The second issue is the Fed’s tapering stance as we have heard a more hawkish statement from the Fed earlier in June. Hence, investors are getting more cautious on the Fed’s upcoming statements to as discussions on tapering may begin soon.

Fixed Income

The bond market posted negative performance in June as the 10-year government bond yield increased from 6.430% to 6.560%. Foreign investors booked net inflow of USD1.3bn to the bond market in June. The market was hit by the rise of the US inflation which reached above 5% in May. Hence, the Fed has given a hawkish signal for the first time during the pandemic which sparked concerns among bond investors. The US Treasury yield fell from 1.58% to 1.47% while the USD denominated Indonesian 10-year yield (INDON31) closed at 2.08% at the end of June.

The bond market started the month on a positive trend supported by foreign inflows and stronger demand in government bond auctions. Improving macro conditions such as PMI and strong trade balance also gave support to the bond market. However, the yield started to trend up towards the middle of the month when the US announced its May inflation of over 5%. The Fed also hinted two possible rate hikes in 2023 and may start discussions on tapering. Despite the Fed maintaining rate and asset purchases after the FOMC meeting, the hawkish statements nevertheless caused concerns to bond investors. However, the Fed tried to reassure that improvements in employment data and consistently high inflation would be needed to justify tapering.

Market pressure remained in the second half of the month due to resurgence of COVID-19 cases in Indonesia post Lebaran holiday. As infection rate and hospital bed occupancy rate increased, the government has put stricter mobility restriction policies in the country. Hence, investors are concerned on whether the needs for stimulus would increase in order to support the economy. Meanwhile, Indonesia posted another trade surplus in May while budget deficit has reached 1.32% of GDP as of May. Bank Indonesia maintained its policy rate at 3.50% and mentioned that it does not foresee inflation to make significant moves until 1Q22 at the earliest. Hence, any tightening monetary policies should only be seen afterwards. The Fed mentioned that it plans to do asset purchase cut first before conducting any rate hikes.

In terms of issuance, the government continued to see improvements in auction demand during the month. As of June, the government managed to issue about IDR699.8tn of bonds YTD. All-in-all, YTD bond issuance has reached 45.6% of the government’s FY2021 issuance target. As of end of June, foreign ownership of IDR government bond has reached IDR977.4tn, or 22.8% of total outstanding amount.

Fixed Income Outlook and Strategy 

We are neutral in terms of view and duration strategy for fixed income as 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. Meanwhile, we also expect some headwinds in the next few weeks due to the resurgence of COVID-19 cases in Indonesia. Investors are now are also monitoring the government’s responses in terms of mobility restrictions as it would impact the country’s GDP growth and fiscal needs. 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.

The bond yield resurged up in June to about 6.6% as the Fed gave out hawkish statements mentioning possible two rate hikes in 2023 and start of taper discussions coming soon. The Fed reiterated that consistent high inflation, strong economic recovery, and improving employment data are needed to justify tapering.

Meanwhile, the resurgence of COVID-19 cases in Indonesia post Lebaran holiday has sparked investors’ concerns. However, at this moment we have only seen some volatility and not a heavy selling pressure. Faster vaccination pace should also help getting the country more defensive against the pandemic. Despite so, investors would need to monitor the government’s responses in terms of stricter mobility restrictions as it may slow down the 3Q21 GDP growth. In addition, stricter mobility restrictions may also impact the government’s budget deficit as it may slow down revenue and, depending on the government’s responses, may add spending needed to combat impacts of the resurgence of cases. The government mentioned before that it is committed to keep its deficit target at 5.7% of GDP this year and, if needed, would reallocate spending from budgets such as infrastructure and regional transfer. Hence, we would need to monitor the development of the current wave of COVID-19 in Indonesia.



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