Indonesia’s recovery presents opportunities

The enforcement of stricter and wider lockdown has seen Indonesia successfully mitigated  the spread of the virus


INDONESIA experienced a recession much like other countries in 2020 due to the fallout from the unprecedented health crisis triggered by the Covid-19 pandemic. The Jakarta Composite Index (JCI), the main benchmark of the Indonesian equities market, was hit badly during the rst wave of Covid-19.

The index has managed to recoup its pandemic-driven losses as economic data and the latest developments on Covid-19 suggest the fundamentals of the Indonesian market have more or less changed moving into the second half this year (2H21).

Entering 2H21, Indonesia did not kick start well as the pandemic risk loomed large, with cases increasing substantially, leading the government to again reimpose restrictions on July 3 to curb the spread of the highly transmissible Delta strain.

The enforcement of stricter and wider lockdown has seen Indonesia successfully mitigated the spread of the virus.

The government is now preparing its roadmap to reopen the economy but the degree of reopening would still be highly dependent on the progress of the vaccination programme.

At this juncture, the vaccination rates in Indonesia are slower than most of the countries in Southeast Asia but Jakarta has been ramping up its vaccination rates. The Health Ministry has roped in the military, police force and civil society groups to speed up the vaccination drive.

The arrival of more vaccine doses in August has eased worries on the supply bottleneck, bringing the Indonesia vaccination rates back on track.

After suffering from an economic downturn over the past four quarters, Indonesia has finally pulled out from the recession, ending its second quarter (2Q) with a strong GDP growth rate of 7.1%.

The upswing was mainly attributed to surging exports, a rebound in consumption and investment and bigger government spending.

The high growth rate could be partly explained by the low base effect as well.

Indonesia’s 3Q GDP performance is unlikely to sustain a strong growth rate as the previous quarter as a result of the stricter control measures over the past two months derailed the nation’s economy from the recovery path.

That said, we are still holding an optimistic view of Indonesia’s economic prospect and expecting it to post solid GDP growth in the following quarters as the rapid progress on vaccinations will fuel economic reopening.

Consequently, the Indonesian equities market is expected to extend its upward trend in tandem with steady economic growth.

Despite the reimposition of the lockdown measure, Indonesia still managed to extend its trade balance surplus for the 15 consecutive months in July.

Exports continue to outpace imports backed by high commodity prices and improved global demand while imports fell following the July lockdown.

Its oil and gas and non-oil and gas exports show sustainable recovery, albeit a drop from the historically high value of US$18.54 billion (RM77.31 billion) in June amid the seasonal factor.

Indonesia would potentially be one of the beneficiaries from the global economy recovery as the country is a major exporter.

China, the US and Japan are major trading partners of Indonesia and buy products such as coal, palm oil and manufactured goods.

We expect the sustainable global economic recovery and high commodity prices will likely continue to be the tailwinds that allow resource-rich Indonesia to book big export earnings for the remainder of the year.

Bank Indonesia continued to maintain its accommodative monetary policy unchanged, supporting its economy throughout the fallout of the pandemic.

At its August rates meeting, its board of governors agreed to leave its benchmark interest rate at record low 3.5% while maintaining the deposit facility rates at 2.75% and lending facility rates at 4.25%.

The country’s foreign-exchange reserves of US$137.1 billion as of June are a buffer to defend Indonesia from any further external shock.

Under the roof of loosening monetary policy, Bank Indonesia is able to protect the stability of the exchange rate and financial system and tide the economy through the pandemic gloom.

We opine Bank Indonesia will extend its loose monetary policy at least until 1Q22 and this is expected to continue to be the tailwind for Indonesia’s equities market.

Despite the fact that the earnings metric of the Indonesian equities market has been downgraded, valuations remain attractive with ample room for upside potential.

The JCI is now trading at 13X price earnings (PE) multiple based on 2023 estimated earnings, far below our in-house fair PE of 16X, which translated into a 22.88% upside potential.

Valuation aside, Indonesia equities are expected to deliver earnings growth of 18.44% and 10.79% in the financial year 2022 (FY22) and FY23 respectively.

The estimated dividend yield of 2.22% and 2.55% in the coming two years is set to bulk up the total return of investing in the Indonesian equities market.

The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.