The iShares MSCI Indonesia ETF (NYSEArca: EIDO) and the VanEck Vectors Indonesia Index ETF (NYSEArca: IDX) are up an average of 11.3% year-to-date, solid performances among emerging markets single-country exchange traded funds in 2016.
Favorable government policies and a surprisingly accommodating central bank were among the policies driving Indonesian equities and the aforementioned ETFs higher.
Indonesian markets bounced after parliament approved a tax amnesty that the government believes would draw in billions of dollars to finance a budget gap as the country invests to expand its infrastructure in a bid to stimulate economic growth, Bloomberg reports.
There is some good news for Indonesian stocks and the aforementioned ETFs heading into 2017 and it comes courtesy of one of the major ratings agencies.
“Fitch Ratings’ Outlook on Indonesia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) has been revised to Positive, with both ratings affirmed at ‘BBB-‘. The issue ratings on Indonesia’s senior unsecured foreign- and local-currency bonds and foreign-currency sukuks – issued through Perusahaan Penerbit SBSN Indonesia II and III – have also been affirmed at ‘BBB-‘,” said Fitch Ratings in a note out earlier this week.
President Joko Widodo’s government is facing a widening budget deficit and is anticipating the tax amnesty to help bring finances back in to balance.
“Indonesia’s ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with a weak external position compared with ‘BBB’ category peers that makes the country relatively vulnerable to shifts in market sentiment and a weak – but improving – business environment,” notes Fitch.
Analysts point out that Widodo is adding jobs in major construction projects for unskilled labor, which could stimulate demand for basic consumer goods. Indonesia’s central bank has lowered interest rates this year, something to be mindful given the hefty financial services weights found in EIDO and IDX.
Fortunately, Indonesia’s sovereign rating is not heavily exposed to the banking sector.
“Fitch considers the sovereign’s exposure to banking sector risks as limited. Private credit represents only 36% of GDP and the banking system’s health is relatively strong, although risks built up in the previous credit cycle imply a more challenging operating environment. This has led to deferral of private-sector capital expenditure and has increased gross non-performing loans to 3.2% of total assets in October 2016, from a low of 1.8% at end-2013. However, the banking sector’s capital adequacy is strong, at 22.9% in October 2016,” adds Fitch.
For more information on the developing economies, visit our emerging markets category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.