Rate-Hike Risks, Rupiah Send Indonesian Stocks to December Low

Indonesian equities dropped the most in Asia, with the benchmark gauge sinking to its lowest level since Dec. 15, on concern that Bank Indonesia may raise interest rates for the first time since 2014 to defend the currency, which is already hurting economic growth.

The Jakarta Composite Index fell 2.5 percent to 6,073.02. Banking stocks slid the most on the prospect of higher borrowing costs crimping loan growth and the economy.

The Jakarta Finance Index dropped 4.1 percent as all nine industry groups on the benchmark retreated. PT Bank Central Asia lost 4.8 percent, the most since November 2015, while PT Bank Mandiri, the country’s biggest lender by assets, plunged 7.8 percent.

“The Jakarta Composite Index may fall further, probably testing the 6,000 level,” said Harry Su, managing director at PT Samuel International in Jakarta. “Investors can start accumulating some shares at this point.” He recommends Bank Central Asia and Mandiri.

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Analysts from PT BNI Sekuritas, PT Ciptadana Sekuritas Asia and PT Mirae Asset Sekuritas Indonesia said the depreciating currency, which sank to a two-year low against the U.S. dollar today despite “sizable” central bank intervention, has raised the odds for a higher benchmark seven-day reverse repurchase rate as early as next month. Indonesia’s next monetary policy decision is scheduled for May 17.

“First-quarter results from Unilever suggested that our economy growth was still weak,” according to John Teja, a director at Ciptadana, referring to the Indonesian unit of the Netherlands-based consumer goods maker. “A weaker rupiah and rising oil price could lead to higher inflation and all of these factors combined could slow loan growth in the banking industry.”

Foreign Exodus

Indonesia sees second-most foreign capital outflow in Southeast Asia

Source: Bloomberg

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The rupiah is under pressure as rising U.S. Treasury yields and a stronger dollar rub the luster off emerging-market assets. The currency fell as much as 0.3 percent to 13,925 against the dollar, the lowest since January 2016, stretching its losses to 2.6 percent this year. The yield of Indonesia’s benchmark 10-year government bond maturing May 2028 jumped 21 basis points to 7.13 percent.

“Higher distribution expenses as a result of rising oil price and raw material costs would adversely impact the gross margins of Indonesian companies,” Teja said.

— With assistance by Divya Balji

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