The Indonesian government has reduced its fuel subsides to free up cash for infrastructure projects, potential stimulating Indonesia’s equities market and related exchange traded funds.
Over the past week, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) is up 2.9% and the Market Vectors Indonesia Index ETF (NYSEArca: IDX) is 2.5% higher. Year-to-date, EIDO increased 21.2% while IDX gained 17.8%.
Finance Minister Bambang Brodjonegoro calculates that the increased price of subsidized gasoline will provide the government with about 100 trillion rupiah, or about $8.23 billion, for state spending and to reduce the budget deficit, reports Harry Suhartono for Bloomberg.
“The fiscal space is more relaxed now and the government can boost spending on infrastructure, which in the long run can lower economic costs,” Masassya said in the article.
The Bank of Indonesia also hiked rates to 7.75% from 7.5% to prevent inflation from rising too quickly in response to the increased subsidized fuel prices.
“The rationale would probably be to preemptively cap inflation expectation and ensure currency stability,” Santitarn Sathirathai, an economist at Credit Suisse Group AG, said in a Bloomberg article. “The rate move should be good for macroeconomic stability, but have some negative impact on growth.”
Indonesian stocks have been strengthening as foreign investors poured $4.2 billion into local equities, betting on Widodo to implement economic reforms and spur growth. [More Gas in the Tank of Indonesia ETFs]
Jahanzeb Naseer and Bernard Kie, analysts at Credit Suisse Groupe AG, argue that consumer staples companies will benefit from President Joko Widodo’s social programs.
EIDO has a 12.0% position in consumer staples and IDX has a 16.4% weight in consumer staples. Financial stocks make up the largest component in both ETFs at 36.5% of EIDO and 32.4% of IDX.
The change to fuel subsidies “is encouraging since it suggests that (Widodo) is serious about economic reform in Indonesia, and is even prepared to take steps that may prove unpopular in the short run,” Gareth Leather of Capital Economics said in a Today Online article.
iShares MSCI Indonesia ETF
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Max Chen contributed to this article.