|
The Jakarta Composite Index rose sharply in late September
and early October. But is the recent stock market rally supported by
strong economic fundamentals? And, looking forward, what are the
prospects for the Indonesian economy?
Well, firstly, it should be remembered that the state of the Indonesian
economy is very important in determining the sustainability of a stock
market rally. This is because a strong economy will boost corporate
profitability, thus increasing the value of those companies and,
therefore, leading to higher stock prices. Market speculation and
trading based on rumors will, by contrast, only affect share price
movements in the short to medium term.
To ascertain the overall current economic conditions, Danareksa
Research Institute has developed a Coincident Economic Index (CEI) for
Indonesia. The CEI is constructed using data on cement consumption, car
sales, imports, real money supply and retail sales. An increase in this
index suggests improving economic conditions, and vice versa.
In the first two months of 2007, the CEI fell. This indicated that the
economy was slowing. Yet, since March 2007 the CEI has headed higher.
Indeed, in the five months up to July 2007 the CEI has risen every
time, suggesting that the economy is on a sound footing.
Improving purchasing power has been one of the pillars underpinning
brisker economic activity. Inflation, which had dented consumer
purchasing power at the beginning of the year, started to come under
control in the second quarter of 2007. More specifically, the price of
rice, a staple foodstuff in Indonesia, has fallen steadily since March
2007. And by July/August, rice prices were at their lowest levels in 8
months, or significantly lower than in the first quarter of 2007. Note
that rice prices have a significant impact on people's purchasing power
since this foodstuff has a large weighting in consumer expenditure.
And looking ahead, inflation is likely to remain benign. Nonetheless,
there will be some short-lasting pressures on inflation during the
fasting month and also over Lebaran due to seasonality factors. Hence,
the year-on-year inflation rate is expected to hover around 6.9 percent
from September to November.
Importantly, however, the long-term trend for Indonesian inflation is
not likely to be altered. And the impact of Ramadhan and Lebaran on
inflation is likely to be completely gone by the end of December when
inflation is expected to fall to 6.26 percent.
One of the main reasons for the expected fall in December's inflation
rate is that rice prices are not likely to increase as much as they did
in December 2006. This year the government has imported rice of various
qualities (including prime quality rice) in a bid to prevent a
significant increase in rice prices at the end of the year.
Thus, with the prospect of relatively low inflationary pressures,
consumer purchasing power will not be eroded further.
Moreover, the relatively low inflation will also provide room to the
central bank to cut its benchmark rate further in the near term.
Nevertheless, the likelihood of the central bank cutting interest rates
in the period October-December is rather slim, we feel, given that
inflation is likely to stay relatively high at around 6.9 percent
during this period.
In January 2008, however, the central bank may opt to cut its benchmark
rate again since inflation will fall to around 6.26 percent in December
(the data is released in early January 2008). For 2008 as a whole,
inflation is expected to remain benign and even fall to around 5.3
percent by year-end. Thus, we believe the Indonesian central bank will
have cut its benchmark rate to as low as 7 percent by the end of that
year.
As such, people's purchasing power is likely to remain strong in the
near term. And the government's plan to hike civil service salaries by
around 20 percent next year will -- to some extent at least -- increase
household purchasing power further. Note that since household spending
accounts for around three quarters of Indonesian GDP, this greater
purchasing power should be able to drive brisker economic growth going
forward.
Brisker economic activities and brighter economic prospects are also
revealed by our business sentiment survey. Every other month we survey
around 700 CEOs of companies operating in Indonesia.
From the survey's findings, we construct a Business Sentiment Index
(BSI). The interpretation of the index is quite simple: a reading above
100 indicates that the CEOs are optimistic (which often means that
economic conditions are improving), while a reading below 100 indicates
that CEOs are pessimistic (usually a reflection of deteriorating
economic and business conditions).
Based on our surveys, the BSI has increased consistently since January
2007, thereby indicating that the CEOs' businesses are doing better.
From a reading of 115.0 in January, the BSI rose to 123.5 in July 2007;
this improving trend suggests that the economy is picking up its growth
pace.
In addition to the improving domestic factors, external factors are
also proving favorable for the Indonesian economy. Despite the
sub-prime lending debacle in the US, Indonesian exports to the global
market have remained strong in 2007.
In August, for example, exports reached US$9.61 billion. And in the
first eight months of 2007, exports reached US$73.75 billion, up 13.4
percent from the same period in the previous year. This shows that
global demand for Indonesian products remains strong.
Furthermore, Indonesia has been able to diversify its export markets.
In 1996, for example, Japan accounted for 25.9 percent of Indonesia's
total exports. Yet by 2007, Japan's share had fallen to 20.8 percent.
Meanwhile, Indonesia's exports to the US declined from 13.6 percent of
the total in 1996 to around 10.4 percent in 2007.
By contrast, however, China's share of Indonesian exports rose from 4.1
percent in 1996 to 8.4 percent in 2007. This suggests that Indonesia
has been able to diversify its export markets; a positive development
considering that Indonesia's exports will be less affected overall by
instability in any one of the countries.
Against this backdrop, we believe that the current economic recovery is
sustainable. Hence, the Indonesian economy is likely to continue
picking up its growth pace going forward. Indeed, the Indonesian
economy is expected to grow by 6.2 percent in 2007 and by 6.3 percent
in 2008.
As such, the current rally in the stock market is likely to be
sustainable, we believe, given that it is supported by good economic
fundamentals.
|
