Monthly Market Commentary - September 2020


In response to the Parliament’s plan to introduce a new bill on the central bank, the Minister of Finance reiterated that she plans to keep Bank Indonesia’s independency intact. The minister also mentioned that she is now seeing higher budget deficit in 2021 at 5.7% from previously 5.5% of GDP due to higher expectations of expenditure while revenue would remain soft. The fiscal policy stance in 2021 will continue to support recovery and accommodative. In addition, the current burden sharing private placement scheme with Bank Indonesia will be one-off for 2020 and will not be extended to 2021. However, BI will remain as standby buyer of government bond next year. The minister is also expecting the deficit to return below 3% by 2023. Due to reimplementation of PSBB, the ministry is now expecting 3Q20 GDP growth of -2.9% to -1% YoY and FY2020 GDP growth of -1.7% to -0.6% YoY. 

For the third month in a row, Indonesia reported another monthly deflation of 0.05% MoM which implies inflation of 1.42% YoY in September. Food and air transportation are again the major drivers of the deflation in September. Chicken and egg prices specifically were the ones driving the deflation which implies culling effects has not shown up. Meanwhile, re-implementation of PSBB caused the weak air transportation price. Core inflation, thus, slowed down from 2.03% YoY in August to 1.86% YoY in September.

Indonesia once again reported another trade surplus in August at USD2.3bn. Export contraction narrowed from -9.9% YoY in July to -8.4% YoY in August. Exports to China and the US continued to increase going along with the economy reopening. Meanwhile, CPO and iron and steel exports drove overall exports due to stronger price. Import contraction also narrowed from -32.5% YoY in July to -24.2% YoY in August. Raw material imports improved along with iron & steel, plastics, and food imports.

As of August, Indonesia recorded budget deficit of 3.05% of GDP, widened from 2.01% in as of July. Revenue dropped by 13% YoY as both tax revenue and non-tax revenue both declined at -13.3% and -13.5% YoY respectively. Income tax and VaT remained sluggish due to weak domestic demand while non-tax revenue was hit by lower natural resource revenue. Government spending, on the other hand, grew by 10.5% YoY driven by social spending and the economic recovery program. Hence, spending has now reached 56% of the government FY2020 target. As of September, fiscal stimulus realization has now reached 43.9% of FY2020 target.

Forex reserve continued to increase from USD135.1bn in July to USD137bn in August due to government loan draw down and oil & gas related revenue. As expected, Bank Indonesia maintained the policy rate at 4.00% during the month’s meeting. USD/IDR closed at IDR14,893/USD which depreciated by 1.6% MoM mainly due to concerns on BI independence and rising COVID-19 concern.



Local Market

September put JCI’s monthly gain streak to an end as the index recorded negative return of 7.0% MoM. Foreign investors recorded fund outflow of USD1.1bn (IDR15.6tn) from the equity market. As cases of COVID-19 continued on the rise, Jakarta was put under stricter PSBB once again and hence put the equity market under pressure. The country continued record 3,000-4,000 daily new cases where one third of the cases is from Jakarta, where capacity of ICU and hospital beds started to reach its capacity. Thus, the PSBB was reinstated and caused exacerbated investors’ concerns. In the same time, investors, particularly foreign ones, were concern on Bank Indonesia’s independence after the Parliament proposed a new bill that would put a monetary committee, which will include representatives from the Ministry of Finance, in charge of the monetary policies. Despite the government’s claims that it is their best interest to keep the central bank independent, the on-an-off news flow created noise that pressured the market. Meanwhile, the Minister of Finance mentioned that she is now seeing 3Q20 GDP growth at -2.9% to -1% YoY and FY2020 GDP growth at -1.7% to -0.6% YoY while 2021 budget deficit is expected to be higher at 5.7% of GDP from 5.5% previously due to expectations of soft revenue and higher spending. The official 2021 state budget was also approved at the end of September with limited changes from the draft. From the global side, the equity market was initially supported by the ever-dovish central banks such as the Fed and the ECB which claimed that they will maintain low rates at this juncture, thus, liquidity remains ample. The Fed also mentioned that it does not plan to increase rates until early 2024 to give support to economic recovery during the month’s FOMC meeting. However, the negative sentiments came from the global market as US tech stocks started to see sell downs while Astra Zeneca mentioned that it is temporarily halting its vaccine trials due to discovery of symptoms of a rare disease found in one of its trial patients. Hence, we saw investors turned risk-off afterwards. Towards the end of the month, the global equity market was also hit due to noises from global banks including HSBC, JPM Chase, Deutsche Bank, Standard Chartered, and Bank of New York on allegation of illicit fund movements which also put pressure to the JCI. Meanwhile, due to resurgence of COVID-19 cases, the UK is also put in another “lockdown”, adding pressure to the global equity market. Across the pond, the US’ discussion on its next fiscal stimulus hit another hurdle while the country’s tension with China remained fierce as President Trump proposed for banks on Chinese apps TikTok and WeChat from US made platforms.

The Jakarta Construction, Property and Real Estate Index was the winner in September with a gain of +14.5% MoM driven by third-tier Property stocks which were mainly moved by retail investors. On the other hand, the first-tier Property names mostly posted a weak MoM performance due to the re-implementation of Jakarta PSBB. Top 5 index drivers were: POLL (+179.6%), MKPI (+57.5%), KIJA (+28.5%), MTLA (+20.3%), and PLIN (+4.2%).

Global Market

For the first time since the global market sell-off in March, the US market booked negative performances in September as investors started to scale back expectations on the next fiscal stimulus package coupled with the tech sector sell-off during the month. DJIA 27,781.7 (-2.3%); S&P 500 3,363.0 (-3.9%); NASDAQ 11,167.510 (-5.2%). Meanwhile, the Fed extended its prohibition of stocks buyback by large banks while continuing its limits on dividend payments by those banks to preserve capital level. Uncertainties surrounding the US election also put investors in a more conservative mode. The second presidential debate will be held in October with Biden so far leading in polls. Market will likely pay attention as well on whether the US will have sweep or split congress after the election.

The Asian markets closed mixed in September as investors tried to assess on outlook and economic recovery. NIKKEI 23,185.1 (+0.2%); Hang Seng 23,459.1 (-6.8%); Shanghai Comp 3,218.1 (-5.2%); Straits Times 2,466.6  (-2.6%); FTSE Malay KLCI 1,504.8 (-1.3%); KOSPI 2,327.9 (+0.1%). China’s manufacturing PMI remained strong at 51.5 compared to 51.0 in August while non-manufacturing PMI also rose to 55.9 from 55.2 in August. Meanwhile, the US-China tension continued to heat up as President Trump proposed on bans on some Chinese owned apps including TikTok and WeChat.

The European markets were down in red in September as investors were concerned on rising COVID-19 cases in the region while Germany warned on delays in the EU’s recovery fund due to governance disputes. FTSE 100 5,866.1 (-1.6%); CAC 40 4,803.4 (-2.9%); DAX 12,760.7 (-1.4%). Treasuries and German bonds dropped as investors cut back on haven assets. The GBP strengthened on hopes that the UK and the EU officials will be able to make progress on Brexit as talks begin.

Outlook and Strategy 

The Omnibus Law and positive news on COVID-19 vaccine are key positive catalysts that could help propel the equity market between now until the end of the year should either manage to come to surface. As foreign investors have been selling down Indonesia equities since the start of the year, these positive catalysts would be the ones to pull back the flow into the market.

On top of the weak economic growth, noises on BI independence has also caused volatility to the market as the Rupiah is put under pressure. Hence, sectors such as consumer staples would be among the ones better off due to low raw material costs, while, export sales would be able to support earnings. The 2021 state budget has been approved with a higher budget deficit plan of 5.7% of GDP to accommodate revenue shortfall and higher spending. 

From the global side, noises from the US election may be the one that investors need to pay attention to as we are closing in to the election. In late September, news broke out that President Trump indicated that transition may not be smooth should he does not get re-elected. While in the same time stalemate in congress has been delaying the CARES II Act for the past months now. We expect tension between the US and China will continue to heat up as we approach the US Election in November. Meanwhile, investors started to raise concern on a new wave of COVID-19 in Europe with the UK now back in “lockdown”. Hence, these noises may cause volatility in the market in the coming weeks.


Fixed Income

The bond market has been more resilient in comparison to the equity market as the 10-year government bond yield slightly increase from 6.864% to 6.967% in September. Foreign investors recorded net outflow of USD594mn from the bond market in September. Concerns on BI independence and reimplementation of Jakarta PSBB were the main drivers that pressured the bond market as such foreign investors continued to post outflows. However, dovish central bank and continuous positive trade balance managed to support the bond market along with local investors. The US Treasury yield slipped from 0.71% to 0.69% while the USD denominated Indonesian 10-year yield (INDON30) closed at 2.34% at the end of September.

The bond yield curved up at the start of the month with foreign outflows when Parliament mentioned that they are preparing a bill that would reduce BI’s independency to the government by creating a monetary committee to determine monetary policy. As a result, the Rupiah weakened as investors, particularly foreign, showed concerns on the issue. In the same time, local investors also were seen to take profits during the period. Though the Ministry of Finance’s confirmation on the burden sharing private placement scheme being one-off managed to quell investors’ concerns.

However, things turned shaky again when Jakarta’s PSBB was announced by the Governor which pushed the bond yield up with foreign posting further outflows from the bond market. In addition, the government announced that 2021 budget deficit target is widened to 5.7% from 5.5% of GDP while 3Q20 GDP growth is estimated at -2.9% to -1% YoY and FY2020 GDP growth at -1.7% to -0.6% YoY due to the reimplementation of PSBB in Jakarta. The bond market regained some composure with Indonesia posting yet another trade surplus in August while the Fed announced that it will maintain its low policy rate at least until early 2024. Meanwhile, Bank Indonesia maintained its policy rate at 4.00% for the month.

In terms of issuance, the government still managed to gain some demand from local investors, however, number of bids are noted to have lowered. As of September, the government managed to issue about IDR1,101.2tn of bonds YTD. The amount includes IDR183tn of issuance through the private placement scheme with Bank Indonesia as part of the burden sharing arrangement between the central bank and the government. All-in-all, YTD bond issuance has reached 71.9% of the government’s FY2020 issuance target. As of end of September, foreign ownership of IDR government bond has reached IDR938.7tn, or 28.0% of total outstanding amount

Outlook and Strategy 

Bond investors will likely pay attention to the official 2021 state budget which came out at the end of September. The government recently announced that they are now seeing higher budget deficit target of 5.7% of GDP from previously 5.5% in 2021 due to higher spending as well as to accommodate tax shortfall. Hence, bond investors need further clarity on the deficit and financing plans to get a better sense of supply risk in 2021. As of now, the Ministry of Finance indicated that Bank Indonesia may be asked to be standby buyer for government bonds but there will be no private placement scheme like there is this year.




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