Analysis: Four govt policies and four BI measures

JAKARTA. Indonesia was the only equity market in Asia Pacific to book a significant increase (+1.5 percent) on Tuesday, although India and Taiwan also closed in the green but flat. Apart from values emerging following an overall 23 percent market drop since its recent peak back in May, we believe the Financial Service Authority’s (OJK) announcement of allowing buybacks without the need for extraordinary shareholders’ meetings (ESMs) also contributed to Tuesday’s market rebound from its strong technical support of 3,838 (-3.3 percent) to close in the green.

Additionally, late last week, the government unveiled a set of four policies, albeit aimed at a more mid-term response, as follows:

1. Current account deficit and rupiah stabilization: This will be achieved through:
Tax breaks on companies in labor-intensive industries with at least 30 percent export output. Impact: This will benefit Indonesia’s largest textile/garment manufacturer, Sritex (SRIL).
Consumption of biodiesel to be boosted to reduce import reliance on crude-based fuel. Impact: Positive for crude palm oil (CPO) as it is used as a raw material in biodiesel.
Hike in the luxury tax rate on imported goods (including completely built cars and branded products, according to Bloomberg) from 75 percent to 125-150 percent. Impact: This move to raise taxes in branded products will be negative for upmarket retailer Mitra Adiperkasa (MAPI).
Temporary delayed limitation on raw-mineral exports such as nickel ore, iron ore etc. Impact: This will benefit Aneka Tambang (ANTM) as the company will be able to continue selling its nickel ore.

2. Economic growth safety net: Safeguarding economic growth will be achieved through maintaining the 2013 state budget deficit at 2.38 percent. Additionally, the government will provide fiscal incentives comprising relaxations on facility restrictions to the bonded area for domestic products and scrapping luxury tax on base products, not categorized as luxury goods.

3. Purchasing power support: The government will coordinate with Bank Indonesia (BI) to maintain price volatility and inflation. This will be partly implemented through the restructuring of meat and horticultural import policies from quota based to price based.

4. Investment acceleration: The government plans to slash regulations for the upstream oil and gas industry from 69 to eight rulings. In addition, the government plans to revise its rulings on the current Negative Investment List (DNI) as well as accelerating investment in export-oriented sectors through incentives, and renegotiating mining contracts of work (CoW). Impact:
Higher investments in the oil and gas industry.

Furthermore, the central bank has issued four measures to stabilize financial markets:

1. Foreign exchange (forex) term deposits and BI deposit certificates: Current maturity will be stretched from seven, 14 and 30 days to between one day and 12 months, providing forex flexibility in tenors for banks to place in BI. The central bank also plans to release a new money market instrument called the BI deposit certificate. Impact: This will support foreign currency supplies as banks are expected to park their excess forex currencies in these instruments instead of hoarding them offshore.

2. Facilitation to aid “good” exporters in obtaining dollars: Relaxation on administrative requirements in order that exporters (those that have converted export proceeds into rupiah) may purchase dollars. Impact: This move will help “good” exporters improve their business activities and enhance efficiency.

3. Swap market: BI can now act as a “counterparty” in swap transactions with commercial banks. Impact: This will cut transaction costs in the FX swap market, providing incentives to boost hedging activities and deepen domestic money markets.

4. VOSTRO account deregulation: BI will exempt non-resident VOSTRO accounts (foreign-owned rupiah demand deposit accounts dedicated to investment returns from financial instruments in stocks and bonds) from being categorized as external short-term bank loans. Impact: This will reduce dollar demand in domestic banks as foreign investors will be able to prolong their rupiah holdings in VOSTRO accounts without having the need to convert to foreign currencies. Note that currently, VOSTRO accounts are still part of a bank’s external debts, which must not exceed 30 percent of the bank’s capital.

We are of the view that the government and the central bank are both taking steps in the right direction to shore up investors’ confidence in Indonesia through the introduction of effective policy management as discussed above.

We believe most of the central bank’s policies have the tendency to provide more of an immediate effect, particularly toward US dollar liquidity efforts. On the flip side, results from the government’s package may only materialize in the coming quarters. However, we note that the government has also provided other measures that are conducive to cushioning the capital market in the form of:

1. Share buybacks by state-owned companies;

2. Insurance companies and pension funds are now allowed to increase the proportion of their investments in capital markets.

Thus, we are of the view that the actions undertaken by the central bank and the government will help improve market performance in the coming months.

Harry Su, Bahana Securities: The writer is senior associate director/head of equities & research at PT Bahana Securities.