Market Commentary - FY21


At the beginning of the year, the government increased its PEN stimulus for the year from initially IDR356tn to IDR699tn. Most of the stimulus would be used to strengthen the healthcare spending while the rest would be used for SME and corporate support and social safety net. The financing would utilize last year’s financing surplus and reallocated budget. Hence, the government was still aiming for budget deficit of 5.7% of GDP in FY2021. The government increased the PEN stimulus from IDR699tn to IDR745tn due to the implementation of the emergency PPKM. The increase mostly came from social safety net by IDR34tn and healthcare spending by IDR21tn. The government to expedite the realization of regional budget stimulus by issuing a decree to ease the bureaucracy and reallocation process. Budget deficit was 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.

The parliament approved FY22 state budget with total revenue target of Rp1,846tn (+6.4%YoY), expenditure of Rp2,714tn (+0.6%YoY), and fiscal deficit at 4.9% of GDP. The government’s assumption FY22 were economic growth of 5.2%, inflation at 3%YoY, and Exchange rate of Rp14,350/USD. Tax revenue was projected to grow at 6.4% YoY mainly driven by domestic tax; on the other hand, international tax and non-tax revenue were expected to decline from normalization of commodity price. The government continued providing stimulus to the market by extending the 0% PPnBM for car with engine capacity of <1,500cc and >70% local content until the end of year.

The Ministry of Finance announced plans for tax reforms to boost the government revenue and bring down the budget deficit back below 3% by 2023. The parliament has approved the harmonized tax law (UU HPP). VAT would be raises from 10% to 12%. The law added a new layer for the income tax bracket where individuals earning above IDR5bn per year will be charged 35% income tax and raised the minimum annual income lowest bracket to Rp 60mn from Rp 50mn. Another round of tax amnesty would be offered for individual/companies to disclose the undeclared assets through the Voluntary Disclosure Program. The government introduced carbon tax and carbon trade to be inline with the target to reduce carbon emission by 29% before 2030.

11M21 budget realization showed a higher revenue and lower deficit. Total revenue accelerated by +19.4%YoY, reflecting robust economic rebound, with income tax +15.1% and VAT +19.8%. Spending was controlled with only +0.2%YoY increase. Fiscal deficit showed an improvement at -3.6% of GDP vs -5.6% in 11M20. The tax office reported a solid YTD 18 December tax collection that has reached 96% of FY21 target. Large tax office has surpassed the FY21 target and YTD realization recorded at +14%YoY with contribution from Income tax +18%YoY and VAT +6%YoY. The tax office was optimist to surpass the target as economy recovery momentum was on track.

Indonesia 3Q21 GDP was recorded at +3.5%YoY vs +7.1% in 2Q21. The slowdown was expected as the second wave Covid19 ravaged the nation. Among GDP component, private consumption decelerated the most at +1.03% in 3Q21 vs +5.96% in 2Q21. Interestingly, machinery demand was solid with double digit growth, which may indicate an expansionary mode in the coming quarters.

Indonesia November trade surplus recorded at USD3.5bn vs USD5.7bn in October. A lower MoM surplus was attributed to higher import that jumped 52.6%YoY. A higher import was lifted by oil imports that jumped 196%YoY as mobility improved. Raw materials and consumer goods booked a higher growth which indicated a higher economic activity. Export grew 49.7%YoY which was still mainly driven by the commodity. The main export destination countries were to US, EU and China for the month of November. The MoF was optimistic that FY21 budget deficit to reach 5.3-5.4% or lower than initial projection of 5.8%. The improvement to continue in FY22 whereby The MoF estimated the budget deficit to decline to 4.1% supported by higher revenue from commodity.

3Q21 BoP recorded a massive surplus of USD 10.7bn vs -0.5bn in 2Q21, which was the largest surplus since 2009. Both Current account (CA) and Financial Account (FA) improved and contributed to the surplus. The CA reached +1.5% of GDP driven by sizeable trade surplus from jump in export. The export value increased dramatically due to higher commodity price (Coal and CPO) and iron & steel export. The FA surplus expanded to USD 6.1bn vs USD 1.6bn in 2Q21. IMF’s SDR of USD 6.3bn contributed the most to the surplus. Portfolio surplus narrowed to USD 1.1bn from USD4.4bn due to net foreign outflow in the bond market.

Bank of Indonesia maintained the policy rate unchanged at 3.5% for the 10th consecutive month. BI signalled that its monetary stance to be pro stability FY22 with other policies (macroprudential, payment system, and financial deepening) to remain accommodative in supporting economic recovery. December inflation recorded at +0.57%MoM resulting FY21 inflation of 1.87%YoY, below BI's lower inflation target range of 2%. Food prices was the main contributor to Dec. inflation with 0.41ppt contribution. Indonesia November foreign reserve increased to USD 145.9bn vs 145.5bn in the month before. BI November consumer confidence index increased to 118.5 vs 113.4 in October 2021. The reading, which was the highest since January 2020, showed an improvement in all category from perception of current situation, job availability to economic outlook. Higher commodity prices have led CCI in ex Java to grow stronger compared to Java region. Bank Indonesia stated that it planned to continue the 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 3Q21 total investment decelerated to +4%YoY vs +16%YoY in 2Q21. The total investment amounted to Rp659tn or 73% of the FY21 target. Total FDI declined by -4%YoY from +18%YoY in the previous quarter. Second covid wave and mobility restriction in Indonesia was the likely cause of slower FDI. FDI contraction was seen in secondary sector (base metal, machinery and chemical) while some improvement was booked in manufacturing sectors (food processing and paper & printing). FDI in mining and plantation posted a solid +65%YoY growth thanks to high commodity prices. Investment from US remained robust at +83%YoY whereas China's dropped by 45%YoY due to slowdown in its GDP growth. DDI grew by 10%YoY in 3Q21 with substantial improvement in primary sector (mining, forestry and plantation). Domestic investment in secondary sector -15%YoY led by chemical and pharmaceutical sector.


Local Market

JCI  has been on a roller-coaster ride in FY21 amid the series of wave from covid19 pandemic. The market had a bumpy ride at the beginning of the year as investors took profit from FY20 year end rally and rising covid cases after the year end holiday. The government gave some incentives to the auto and property sector to help stimulating demand. The Omnibus Law’s implementing regulations were also signed while the board of directors for the sovereign wealth fund was announced. Market saw some excitements when US congress passed the USD1.9tn fiscal stimulus which was later signed by President Biden. Approaching the middle of the year, investors were monitoring the COVID-19 cases in Asia which was initiated by the spike of cases in India which reached over 300,000 daily new cases in April, much higher than the last wave in 2020. Investors were concerned that the same trend would occur in other Asian countries. Countries such as Singapore, Malaysia, Vietnam, Taiwan, and China implemented partial lockdowns due to resurgence of cases. Indonesia started to see an increase in cases and fought delta wave towards the end of June. Infection rate rose from 10% to 22% nationwide while Jakarta’s infection rate was closing in to 37%. Hospital bed occupancy rate in Jakarta reached 92% while daily new cases broke new record and reached over 21,000 cases per day. The government implemented stricter mobility restrictions, converted more hospital beds into COVID-19 beds, and expedited vaccination process, aiming for 1mn shots per day by August. A strict mobility control and government rapid response in strengthening the healthcare system succeeded in pushing down the covid transmission. By end of Sept21, Indonesia’s Covid19 active case was at 36,141 cases (lowest since Aug20) with total recovered patient of more than 4mn people (95.7% recovery rate). PPKM was relaxed as transmission rate has met the WHO standard of <1, national infection rate 7DMA decreased to 2%, all regions’ bed occupancy rate were <30% as of 19 Sept and high vaccination rate at 1.5mn doses/day. The market rallied starting the middle of 3Q until the beginning of 4Q with big caps leading as covid was under control, mobility was relaxed, and commodity price went up. The foreign inflow to equity market was massive and accounted for around Rp36tn around that period. Approaching the year end, the government reported the first local transmission of omicron cases. The government required Covid19 patient with omicron variant to be isolated in the dedicated hospital and did not allow home quarantine. Exacerbated by Fed’s more hawkish tone, investors were more cautious and waiting on the side-line. JCI closed the FY21 by booking 10.1% gain.

JCI changed its sector classification in 2021 into 11 sectors: Basic Materials, Consumer Cyclicals, Energy, Financial, Healthcare, Industrials, Infrastructure, Consumer Non-Cyclicals, Property, Technology, and Transportation. Many can argue that Tech and digital banks had a strong rally last year as mobility restriction has pushed digitization and ecommerce adoption. The reopening sectors such as transportation and consumer cyclicals, had a stellar performance in 2H as covid cases was under control and restriction was relaxed. Additionally, the energy names rose on the 3Q as energy crises loomed globally from rising demand and limited supply/investment in fossil fuels. The laggards were consumer non-cyclical and property sector. The consumer cyclical companies’ margin experienced a margin pressure from higher soft commodity prices amid inability to pass on the price as purchasing power was deemed week. The property sectors was dragged down by mall operators and industrial estates due as traffic/economic activities was slow during the pandemic. Foreign posted a net buy of Rp37.9tn FY21.

Global Market

The US equity market continued its strong annual performances with DJIA/S&P500/Nasdaq booked annual gain of +18.7%/+26.9%/+21.4%. Massive fiscal and covid relief stimulus have provided ample liquidity to the system and put investor on risk on mode. President Biden announced 2022 budget proposal of USD6tn which includes USD4.5tn infrastructure and social spending. In June, the President reached an agreement with the bipartisan senators on USD579bn infrastructure spending. Inflation started to rise since 2Q and went higher towards the year end on higher energy prices, stronger private spending, and tight job market. It did not stop investors from chasing equity as corporate earnings continued to beat consensus expectation and consumer demand was strong. The fed announced its plan for tapering and went more aggressive towards the end of the year. The fed also signaled of possible rate cut once the tapering was completed in 2022. Investors rotated to value and cyclical stocks from growth towards the year and despite rising covid cases.

The Asian Markets delivered mixed performances in 2021 with Nikkei +4.9%, HSI -14.1%, Shanghai +4.8%, Strait times +9.8%, KLCI -3.7% and Kospi +3.6%. The Asian market had a good start of the year on manageable covid cases. Yet they were under pressure in the middle of the year due to the resurgence of COVID-19 cases and the spread of the Delta variant across the region. Chinese equities saw major sell-off due to recent tightening measures in China’s private sectors by the government. Regulatory crackdown on the tech sector, aiming at the internet giants, regarding to anti-monopoly and data security has cause the stocks plummeting. China's Sept21 Manufacturing PMI at 49.6%, the first contraction since early last year, as delta tempering activity. The highly indebted property developers Evergrande warned investors on its challenging financial condition thus mounting investors’ concern of potential default. Japan November CPI recorded at +0.5%YoY, the highest pace since in the past 2 years, due to surging fuel price. Japan November retail sales increased 1/9%YoY vs +0.9%YoY in October as economic activity improved on easing virus concern.

The European market had a strong FY21 performance with FTSE/CAC/Nasdaq recorded gain of +14.3%/+28.9%/+15.8% respectively. The markets were solid on the first half of 2021 as declining COVID-19 infections, easing mobility restrictions, and fast roll-out of vaccines helped support economic activities in the region. The markets were hit at the end of 3Q as Europe was facing energy crisis as a combination of limited supplies, lower power generation from wind turbine and higher demand from economic reopening. European central banks decided to slow down its bond buying program as inflation surge. Better-than-expected earnings results have lifted investors' confidence. The indices declined sharpy, with travel and leisure stocks dragging the index the most, upon the discovery of a new variant. However, a surge of covid cases in December did not stop Santa Claus rally in the European Market. The overall market sentiment was positive as New UK study found that the risk of hospitalization for omicron was 1/3 of delta variant. Furthermore, the study showed that covid vaccines reduce the risk of hospitalization from omicron and booster provided the best protection. The Bank of England raised policy rate from 0.1% to 0.25%.

Equity Outlook and Strategy 

We are positive on equities for 2022 as valuation compared to peer equity markets remains attractive while the fundamental reform story remains intact. Potential listings of new economy stocks in the pipeline would also help attract flow into the equity market. Indonesia’s COVID-19 conditions remained stable despite the global Omicron outbreak. 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. We think that strict border control may help prevent large scale mobility restrictions and, hence, avoid economic downturn. inflation and tightening policies are risks for 2022.

Despite the spread of the Omicron variant, global equity market remained relatively stable towards the end of 2021. For Indonesia, slight correction occurred after strong rally in the previous months as foreign investors posted some outflow towards the end of the year. However, the JCI index remained steady and managed to close 2021 with solid positive gain. JCI is still trading at discounts compared to developed markets and select Asian peers, notably India. Despite similar macro backgrounds, India trades at a high premium valuation compared to Indonesia. Hence, the Indonesian equity market remains lucrative to investors. Blue chip names trade at 10% discount compared to mid-to-small cap names as seen from the performance of the LQ45 and IDX80 indices compared to the JCI index. Meanwhile, the volatile Chinese market caused by series of government interventions in its private sector may also cause asset rotation from China to other countries including Indonesia.

As inflation continues to creep up and the Fed has announced a more hawkish stance for 2022 policies, Bank Indonesia’s policies for the year may also impact the equity market. The central bank would need to monitor the inflation in the country along with the Fed’s policies. We think that inflation in Indonesia will start to climb up in 2022 though at a more benign pace compared to the US due to lack of demand pull inflation. However, to maintain healthy real rate, Bank Indonesia would need to closely follow the Fed’s tapering and rate decisions. We think that Bank Indonesia would start to raise rate towards the end of 2022 after a series of asset purchase cuts and reserve requirement rate adjustments.

Fixed Income

Indonesia 10 years bond yield increased to 6.38% vs 5.89% a year ago. Foreign posted a net outflow of Rp78.9tn for the whole year. The yield rose to as high as 6.8% level at the first quarter of the year as rising global inflation and US Treasury yield has dampened investors’ confidence and caused global investors to shift their assets away from high-risk ones. It went down close to 6% in the middle of 3Q along with US Treasury yield easing down after the Fed reassured investors that they remain dovish in terms of policies. The yield started to climb at the beginning of September when the Fed signaled asset purchase reduction to happen soon and end around mid-2022 and Rate increase might be sooner than expected. The Fed fastened its bond buying program reduction to USD30bn less in December and USD60bn less in January 2022. After the completion of tapering, the Fed expected to adjust the interest rate to combat inflation. The projections showed potential 3x increase FY22. President Biden renominated Jerome Powell to chair the Fed and appointed Lael Brainard as vice chairman. The president applauded Mr Powell's leadership during covid19 crisis and confident that Mr Powell and Ms Brainard would succeed in keeping inflation low, prices stable, and bringing higher employment to make US economy stronger. Indonesian USD denominated 10-year yield (INDON31) closed at 2.15%. Based on bond flow data as of Dec. 31, Foreign ownership in bond was at 19%.

The Ministry of Finance’s announcement to cut the final income tax for bonds from 20% to 10% starting in August for both domestic and foreign investors blew more positive sentiments to the bond market. Meanwhile, S&P and R&I maintained Indonesia’s sovereign rating at BBB/negative outlook and BBB+/stable outlook respectively.

Fixed Income Outlook and Strategy 

Higher inflation and rising interest rates would pressure the bond market. Monetary reversal policies and hefty valuation would limit upside to the bond market at this juncture. We think that low foreign ownership of government bonds at about 21% would limit downsides in the bond market while high real yield and low inflation in Indonesia continues to attract foreign investors. Additionally, the government’s plans to trim down issuance and buyback some bonds would also help reduce supply risks while liquidity remains ample. Hence, should market get corrected, foreign investors may look to re-enter at attractive entry points.

Market friendly policy adjustment is crucial at this juncture. An abrupted change in policy will caused a tantrum we have seen back in 2013 again. While global central banks are going to be facing difficult challenges, Indonesia interestingly has a rather different environment. Strong external balance, positive FDIs, low credit growth, and subdued inflation made Bank Indonesia has enough room to maintain its current policy direction until at least 1H22. The government fiscal balance is also favorable because of better revenue this year. Therefore, it translated into a lower bond issuance until year end. Nevertheless, markets will monitor the progress of burden sharing with Ministry of Finance and not expecting the program to be extended beyond 2022.  



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