Investment Risk Level in Indonesia Decreases, Time for Foreign Funds to Re-enter?

INVESTMENT - JAKARTA. The Credit Default Swap (CDS) or investment risk level in Indonesia has seen a decline in early May 2024. This is largely due to the easing of global uncertainties from the Federal Reserve (the Fed) and geopolitical factors.

According to Bloomberg, as of Wednesday (8/5), Indonesia's 5-year CDS stood at 72.35. This is a decrease from the end of March when it was at 75.54.

Josua Pardede, Chief Economist at Bank Permata, stated that the general decrease in CDS is primarily due to the easing of global uncertainties from the Fed and geopolitical aspects.

At the FOMC meeting in early May, the Fed confirmed that its interest rates had peaked, which subsequently led to a decrease in the higher for longer risk from the Fed.

"This decrease in risk has impacted the global risk premium, thereby contributing to the decline in Indonesia's CDS, both the 5-year and 10-year CDS," he told Kontan.co.id on Wednesday (8/5).

For the second quarter, Josua believes that the risk dynamics of the CDS still originate from external sectors, in line with the uncertainty of the timing of the Fed's interest rate cuts. To date, the Fed has stated that its decisions will heavily depend on the condition of US data.

However, the movement of the CDS is expected to have a limited decline in the second quarter. This is primarily due to the slowing down of economic data in the United States (US).

Historically, the slowing down of US data, followed by an increase in expectations of a decrease in the Fed's interest rates, will support a further decrease in the CDS.

"The same trend will continue, especially in the second half of 2024, when signals from the interest rate cuts become clearer," he explained.

The decline in investment risk levels in Indonesia has also encouraged the inflow of foreign funds. From April 29 to May 2, 2024, Bank Indonesia (BI) announced a net purchase in the state securities market (SBN) amounting to IDR 3.75 trillion and IDR 1.58 trillion in Bank Indonesia Rupiah Securities (SRBI).

Although, there was still a net sale of IDR 2.27 trillion in the stock market. "The inflow movement is in line with the decrease in CDS due to the increasing risk-on sentiment in the global financial market," said Josua.

Josua believes that the continued net sales in the stock market are because foreign investors are still very cautious about entering emerging markets, especially Indonesia. This is due to the lack of clarity regarding the timing of the Fed's interest rate cuts.

"Investors may only start to inflow again in the second half of 2024 after clearer signals regarding the timing of the interest rate cuts," he added.