Indonesia's shock rate hike to affect locally-listed stocks
By Joan Ng

Bank Indonesia unexpectedly hiked its benchmark policy rate by 25 basis points yesterday to 7.25%, the country?s highest in more than four years. This is the second rate hike in two weeks and comes on the back of a weakening Indonesian rupiah and market concerns over the country?s current account deficit. Indonesia?s policymakers have also lowered their GDP growth forecasts. They now expect 2013 growth to come in between 5.5% and 5.9%, down from expectations of 5.8% to 6.2% growth previously.

 

Morgan Stanley economist Deyi Tan believes that Indonesia?s policy rate hike cycle is not over and she thinks the Indonesian rupiah will continue to weaken relative to the US dollar. ?We think a more sustainable economic equilibrium would involve slower cyclical growth, a narrower current account deficit and a less overvalued currency,? she says.

?Global macro developments have forced the hand of policymakers in embarking on policy adjustment. But the macro rebalancing process is not yet over.?

This latest rate hike, coupled with other recent policy initiatives, send a strong message to the markets that the government is willing to do whatever it takes to contain future inflation and the current account deficit, says HSBC. ?This includes accepting ? or even desiring ? lower growth. Bank Indonesia signaled as much by unexpectedly downgrading its growth forecasts to more realistic levels,? it says.

 

For investors, the prospect of slower growth could be negative for Indonesia-linked stocks. The heaviest concentration of these companies can be found in the agricultural commodities space. Oil palm plantation companies  Golden Agri-Resources,  Indofood Agri Resources,  First Resources,  Kencana Agri,  Global Palm Resources Holdings  and  Bumitama Agri  are all based in Indonesia.

 

In a client note issued this morning, UOB Kay Hian Research reiterates its ?buy? call on Bumitama Agri as it believes the company?s debt restructuring has reduced Bumitama?s exposure to Indonesia?s rate hike. The company has converted most of its rupiah-denominated debt into US dollar debt. US dollar-denominated loans now account for about 84% of its total loan book, up from 56.5% at the end of last year, UOB Kay Hian says. ?The loan restructuring also helps to reduce the interest payment as US dollar loans are at lower interest rates,? the brokerage adds. Rupiah-denominated loans currently have interest rates of about 10% to 11% while US dollar-denominated loans have rates in the low single digits. For every two-percentage-point fall in rates, UOB Kay Hian estimates that Bumitama would report a 3% to 4% increase in pre-tax earnings.    ...last: $0.985...