Hot Money Flowing into Indonesia's Bond & Stock Market. A Concern?

Between the start of the year and 17 February 2016 foreign investors added IDR 32.55 trillion (approx. USD $2.4 billion) to their holdings of tradable government bonds (Surat Berharga Negara, or SBN) as local yields are attractive. For example, the yield on the 10-year rupiah-denominated FR0056 - issued in the first week of 2016 - has reached 8.02 percent. This (government) bond issuance was heavily oversubscribed (raising a total of IDR 4.65 trillion).

In essence three factors cause rising foreign demand for Indonesia's government debt paper: (1) controlled inflation (currently around 4.2 percent y/y), (2) Moody's Investors Service's reaffirmation of Indonesia's investment grade status, and Indonesia's lower BI rate. Although the BI rate cut causes short-term pressure on the rupiah, it should encourage investment in the country's real sector. This encourages investor appetite for longer-term bonds.

Foreign Holdings Indonesian Bonds:

Month (2016)	Value Foreign Holdings of Indonesian Government Bonds (in IDR trillion)	Percentage of Foreign Holdings to Total Indonesian Government Bonds (%)
February	591.07	39.41
January	578.32	38.94

 

Month (2015)	Value Foreign Holdings of Indonesian Government Bonds (in IDR trillion)	Percentage of Foreign Holdings to Total Indonesian Government Bonds (%)
December	558.52	38.21
November	548.52	38.15
October	528.76	37.10
September	523.38	37.59
August	525.68	37.75
July	533.63	38.96
June	537.53	39.63
May	514.49	38.89
April	508.18	38.51
March	504.08	38.61
February	507.67	40.03
January	500.83	40.25

^{Source: Bank Indonesia}

Besides the bond market, so-called hot money also flows to Indonesia's stock market, particularly after the Indonesian government announced that the official Q4-2015 GDP growth figure was 5.04 percent (y/y), an encouraging result as it seems to point to an accelerating overall economy. So far this year foreign investors recorded a net buy on the Indonesia Stock Exchange worth IDR 1.83 trillion (approx. USD $136 million). This is still a modest figure but it is expected to rise amid an improving Indonesian economy and negative interest rates in the Eurozone and Japan (a monetary policy that could be in place for several years). Indonesia's benchmark Jakarta Composite has been one of the best performing stock indices in the world so far in 2016.

Performance of the World's Benchmark Stock Indices:

Inflows of foreign capital is also a key factor that has resulted in the strengthening rupiah rate. So far this year Indonesia's rupiah has appreciated 2.4 percent against the US dollar, thus being one of the best performing emerging market currencies in Asia.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Obviously, hot money is highly volatile (especially in the stock market) and these funds can rapidly exit the country when, for example, the US Federal Reserve announces another interest rate hike (this could occur in the second half of 2016). However, there is also concern that the inflow of hot money into Indonesia's bond and stock markets in the first seven weeks of 2016 has been excessive (valuations are increasingly out of tune with the underlying fundamental values) and therefore this could trigger a correction on the short term (perhaps in the second quarter of the year). However, after this adjustment, markets will have room to expand further provided the central banks of Europe and Japan continue their accomodative monetary policies.

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