Macro Strategy: Stability Over Growth

Stock Code	Last Price	Change	Change %
BREN	6.600	400	6,45%
MLPT	31.250	225	0,73%
INCO	3.050	210	7,39%
TPIA	9.200	175	1,94%
KARW	1.570	140	9,79%
PGEO	1.215	135	12,50%
INDF	8.225	125	1,54%
INTP	5.325	125	2,40%

Macro Strategy

Stability Over Growth – What’s Next?

Bank Indonesia kept the rates intact, emphasizing IDR stability while cautiously navigating domestic growth challenges.
BI's hawkish stance often weakens the IDR; attracting foreign inflows via stronger domestic growth expectations is equally crucial.
INDOGB yields are nearing the 7% mark, aligning with our pessimistic scenario, while Dec rate cut could lower yields to 6.65% (our base-case).

Pro Stability at the Fore. Bank Indonesia (BI) maintained the BI Rate at 6.00% during last week’s RDG meeting, focusing on IDR stability amid elevated external pressures, while balancing pro-growth and pro-stability objectives. This decision comes against the backdrop of growing concerns about domestic economic momentum, although BI maintains that solid growth is achievable in 4Q. BI acknowledged a reduced Fed rate cut projection for 2025, adjusted from 75-100bps to 50bps, driven by risks stemming from US policies under Trump. Five key risks to the IDR were highlighted: Trump’s inward-focused policies, stronger US economic growth, a widening fiscal deficit, portfolio flow reversals to the US, and a strengthening DXY. On the macroprudential front, no adjustments were made to address the stagnation of RRR reduction incentives, which have remained at around IDR250tn since July despite expanded sector qualifications. It remains unclear whether banks have maximized these incentives, but loan growth continues to decline, approaching the lower end of BI’s target for 2024. MSME loan growth dropped to 4.7% y-y, nearing a three-year low last reached in August 2024. To address liquidity needs, banks have been net sellers of SBN in November, marking them as the sole net sellers of SBN for 2024.

Domestic Growth Support Focus Is Increasingly Vital. We note that when Bank Indonesia (BI) takes a more hawkish stance than the Federal Reserve, the IDR often weakens further, contrary to the intended objective. This suggests that maintaining rate differentials alone is insufficient to stabilize the currency. In our view, attracting foreign inflows, supported by expectations of a stronger domestic economy, plays a critical role in strengthening the IDR. Such expectations are generally enhanced when BI adopts a more dovish stance relative to the Fed. The current trend underscores this perspective, as the IDR continues to depreciate post BI’s hold its benchmark rate, nearing the 16k level. Since the implementation of the BI 7-day Reverse Repo Rate in Aug-16 there have been 14 instances of rate hikes, with notable impacts on the IDR. Within seven days following the hikes, the IDR depreciated in 9 out of the 14 cases. Over a 30-day period after the hikes, the IDR experienced depreciation in 8 out of 14 instances, highlighting the currency's tendency to weaken following such monetary policy adjustments. Historical patterns showed that the IDR tends to depreciate by an average of 0.24% over the next seven days and 0.36% over the next 30 days after rate decisions. Fiscal liquidity injections, typically stronger toward year-end, may be more selective this year, further constraining domestic growth drivers.

Current Yield Reflects Our Pessimistic Scenario. INDOGB yields have largely erased their gains since the end of July 2024, with the 10-year benchmark yield approaching 7%. At this current level, the yield reflects our pessimistic scenario with BI rate to be maintained at 6.0% until year end and IDR level of IDR15.9k. The movement of INDOGB yields and the IDR is slightly decoupling from UST yields and the DXY, in our view, partly driven by BI’s intervention. While the 10-year UST yield has returned to 4.4% (similar to mid-24), INDOGB yields now only hovers at 6.9% (vs. 7.2%) while the IDR still sub 16k level (vs IDR16,400 level seen in July.)

Slight Revisions on Yield Scenario. Historical trends during U.S. election cycles indicate that a Republican victory typically leads to an average 12bps increase in INDOGB yields and a 2% IDR depreciation by the end of November. However, the current movements in depreciation and yield increases appear more subdued. The 30-day moving correlation between 10-year UST and INDOGB yields has been declining since early November. Based on patterns from Trump’s 2016-win, outflow risks could diminish by December, potentially giving BI room to lower rates and provide a critical boost to domestic economic growth. We have adjusted our baseline yield scenario upward by 7bps to 6.65% from the previous 6.58%, reflecting current market conditions, with a December BI rate cut expected to act as a positive catalyst for further yield reduction. Looking ahead to 2025, we project INDOGB yields within the range of 6.1% - 6.6%, with a baseline of 6.23%, 77bps below the government’s assumption of 7.0%.

Capital Market – Pro Stability Measure Still Led to Increased Volatility

Donald Trump nominated Scott Bessent as Treasury Secretary, leading to a drop in the dollar and UST yields. The markets reacted positively to his nomination, as Bessent’s understanding of financial markets and his appointment were seen as reducing the likelihood of harsh tariffs. He supports cutting government spending while extending the tax cuts implemented during Trump’s first term.

The 10-year US Treasury yield declined by 2 bps to 4.41%, while the 2-year yield rose by 6 bps to 4.37% over the past week. The 10-year Indonesian Government Bond (INDOGB) yield experienced volatility, initially declining to 6.88% before rebounding to 6.92% post BI’s pause in rates. The US Dollar Index gained 1.24% during the week, while the Rupiah depreciated slightly by 0.13%, closing at IDR 15,875 per US Dollar. Additionally, Indonesia’s 5-year Credit Default Swap (CDS) increased by 1 bp to 74 bps.

Fixed Income – Bank Indonesia Continue to Add Position. The Ministry of Finance (MoF) data as of 21st Nov (Thursday) showed weekly foreign outflow of IDR4.1tn, with foreign ownership of domestic Government Securities (SBN) dropping to IDR875tn. On MTD basis, outflows in SBN reached IDR10.3tn. The banking sector also retained its considerable outflows trend, with another outflow of IDR7.8tn last week, with MTD outflow surged to IDR46.4tn. Continuing its pro stability through intervention, Bank Indonesia, excluding repo transactions, recorded another weekly inflows of IDR13.9tn last week (MTD: IDR74.8tn). With rising yield, the mutual fund sector added position with inflows of IDR0.1n, and the insurance and pension fund sector also recorded inflows of IDR1.7tn.
Equity – Continue Foreign Outflow. Foreign outflows in the 3^rd week of Nov reached IDR3.6tn, while the JCI posted a 0.5% w-w increase. Year-to-date (YTD) 2024, foreign outflows in the regular market totaled IDR17.7tn, with month-to-date (MTD) outflows at IDR13.0tn.

Consistent top inflow contributors included INDF, ASII, ANTM, UNTR, TINS, EXCL, AMMN, and ERAA. In contrast, the Big-4 Banks, TLKM, ADRO, BRPT, PANI, MDKA, BRMS, BREN, KLBF, and ICBP consistently led the top outflows. Notably, HEAL, SIDO, and ACES were among the top outflows, with their share prices declining 7.0%, 12.2%, and 6.6% MTD, respectively.

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