Indonesian strategy, Not so surprising rate cut, Macquarie

Indonesian strategy

Not so surprising rate cut

Event

§ Bank Indonesia (BI) decided to cut its BI rate today by 25bps to 5.75%

vs. consensus expectations of no rate cut. The signal for further easing was

provided last month on 17 January when BI decided to bring down the lower

band of the interest rate corridor by 50bps. The primary reason for the current

rate cut is to provide additional stimulus for the domestic economy given the

slowdown in the global economy.

Impact

§ More liquidity to the system. The overnight interbank rate will decline to

~3.75% (5.75% less 200bp) from its previous 4.0%, further boosting domestic

liquidity. The lower BI rate should pave the way for further cuts in the deposit

rate, benefitting banks with greater reliance on more interest-sensitive time

deposits such as Danamon, BTPN, and BJBR. On the other hand, banks with

low LDR and excess liquidity such as BCA could face some short-term NIM

compression. Our top picks in the banking sector are BRI and BJBR.

§ Boost to domestic reflation momentum. Lower interest rates should

continue to be positive for the property sector supporting both further

increases in land prices and strong pre-sales. The cement sector should also

benefit from strong volume growth due to continued strength in the property

market along with the prospect of greater construction activity from the

passing of that land acquisition bill. Lower interest should also encourage

more spending benefiting auto and retail sectors. Top picks for domestic

reflation momentum include BSDE, Semen Gresik, and Mitra Adiperkasa.

§ Inflation/rupiah risk takes a back seat. We believe the recent Moody’s

upgrade on Indonesia's country rating to investment grade and the Fed

reaffirming to hold rates steady until 2014 have overshadowed the negatives

from higher inflation risk. This is evident from the strong demand in recent

government bond auction, attracting bids of Rp42-50tn vs. the historical

average of Rp15tn, resulting in yields on the 3-month T-bill declining from

3.8% to 1.7% and ten-year government bond yields also falling from 6.0% to a

record low 5.0%. FX reserves also increased slightly to Rp112bn as of Jan

12, up from Rp111bn the previous month, while rupiah was relatively stable.

Outlook

§ We believe the current bias from BI is for interest rates to stay low

complemented with macro prudential regulations such as potentially setting a

minimum down payment for auto and housing loans. On balance, despite our

preference for a less aggressive monetary policy, we are moderately positive

on the market given BI is able to hold the rupiah steady.

§ Risks to the Jakarta Composite Index (JCI) include structural inflation risk

which could happen in the latter stage of 2013/2014, Bank Indonesia

regulations negatively affecting the banking sector, and reversal of Fed

interest rate policy.