The team of analysts at UBS Group, Delwin Kurnia Limas, Devinda Paranathanthri, Jessie Ren, Philip Wyatt and Jon Gordon, are of the opinion that the worst should be over with Tuesday’s slumping and trading halt of the Jakarta Composite Index (JCI).
They write in their March 18 note: “While growing domestic risks will likely hang over Indonesian assets and induce a temporary period of capital outflows and exchange rate weakness, we do not think this bout of uncertainty will worsen into a broader crisis.”
Tuesday’s volatility, which was triggered by rumoured changes to Indonesia’s cabinet and revisions to military law, follows news of the Indonesian government's plans to consolidate its ownership of all state-owned enterprises (SOEs) under a single investment holding company, Danantara, which reports directly to the president.
Despite this, the analysts see that the country’s gross domestic product (GDP) is still on track to hit 5% this year, a level below the new administration's targets of 8% but in-line with previous quarters.
“Inflation remains well-behaved and below pre-Covid lows. We think the central bank has room to lower rates down the road, but it may delay cuts for now to help ease IDR weakness,” write the analysts.
With external headwinds already elevated, investors in the Indonesian market must now contend with domestic uncertainties around the role of the sovereign wealth fund and its governance, fiscal discipline, and potential cabinet changes.
See also: Alleged resignation of key Indonesian ministers triggers JCI 7% plunge and trading halt
Valuation multiples have tumbled to levels only seen during the global financial crisis of 2008 to 2009 and in August 2005, when surging oil costs undercut confidence. Presently, valuations have fallen to a 10 times forward price-to-earnings ratio (P/E), compared to a five-year mean of 14 times, while the dividend yield has risen to 6.5%.
In the banking sector, the team of analysts note that elevated US interest rates will likely continue to suppress onshore deposit growth, which limits the loan growth potential of local banks.
“These banks are already facing a loan-to-deposit ratio (LDR) approaching 100%, indicating constrained liquidity. Furthermore, state-owned banks are at risk of being tasked with funding projects with low returns on equity that are essential for economic growth.”
See also: SGX reports February SDAV of $1.5 bil, 42% m-o-m higher while bellwether index grew 1% m-o-m
Despite these uncertainties likely continuing to pressure valuation multiples, the analysts see that the current return-on-equity ratios of these banks are approximately three percentage points (ppts) higher than their ten-year average.
With this ability to deliver shareholder returns while navigating the challenges posed by an infrastructure-driven economic backdrop, the analysts have rebalanced their equity preferences for Indonesia to names with defensive earnings such as Sharia banking firms, select consumer stocks with strong pricing power, and select logistic and supply chain companies.
They write: “We note that fiscal slippage risks have risen, given the unexpected budget deficit in the first two months of 2025, the roll-back of the value-added tax hike, and the anticipated re-routing of SOE dividends to Danantara.”
“While not our base case, we cannot rule out a downside risk scenario where fiscal issues worsen or leadership changes spur a similar loss of confidence.”
They add that in a bear case scenario, Indonesian equities could revisit 2005 levels, which would imply an additional 13% decline from current valuations.
On foreign exchange (forex) and rates, the analysts expect the IDR to trade within a range of 16,200 to 16,600, after the US dollar (USD)-Indonesian rupiah (IDR) spot rate’s rising by 4.6% since November 2024.
Given the lingering US tariff risks, they remain cautious about a rebound in the US$-IDR back to 16,600 in the coming month, while the central bank could seek to moderate exchange rate weakness, which could see official forex reserves drop modestly this month and delay policy rate cuts in the near-term.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
“We think Bank Indonesia will ultimately have space for at least two rate cuts later this year. Local 10-year bond yields have risen 20 basis points (bps) to 30 bps to around 7.3%—a spike that may yet extend beyond recent ranges.”
Notably, limited buying via the central bank could dampen this rise, with much still hanging on the policy direction going forward.
Finally, the analysts at UBS write that sovereign and quasi-sovereign bonds tend to be the most liquid in the Indonesian US$ credit space, and credit spreads of these issuers were largely unchanged in the wake of the equity market sell-off.
“However, in the leadup to Tuesday's equity rout, we had seen modest weakness in spreads for the long-dated bonds, as the market started pricing in a more challenging fiscal backdrop. We believe the planned consolidation of Indonesian SOEs under Danantara should not impact SOE issuer ratings, as state support should remain intact,” writes the team.
While they continue that this could signal increased “national service” commitments and may be credit negative in the event of higher dividend payments, they presently do not expect a material reprice in Indonesian quasi-sovereign bonds.
For Indonesian banks, credit fundamentals remain broadly healthy, capital positions are strong, and their asset qualities look benign.
Although net interest margin (NIM) compression and liquidity pressures remain risks to watch, the analysts do not anticipate a material impact.
“Majority government ownership for our covered Indonesian banks also suggests they could tap state support, if needed. Any fiscal changes must be closely monitored, though we don’t see the deficit slipping beyond the legislated 3% level.”
The team believes that Indonesia’s fundamental metrics like debt-to-GDP compare favourably versus BBB-rated sovereign peers, leaving adequate headroom for its credit rating.
With this in view, they see that any material cheapening in investment-grade rated bonds from here would present an opportunity. Sovereign and quasi-sovereign five-year bonds offer yields of around 4.8% and 5.1%, respectively.
“We also remain comfortable owning select subordinated bonds of Indonesian banks, whose yields screen wide among regional peers,” concludes the team.
Other takes
Macquaire Capital head of Indonesia research, Ari Jahja, believes that investors are adopting a wait-and-see approach, although they agree valuations appear undemanding.
“Also, the market will be closed for Lebaran holidays between 28 March to 7 April – so some investors may prefer to de-risk,” writes Jahja in his Mar 18 report.
As at February, Indonesia’s budget deficit was IDR31.2 trillion, driven by a revenue of IDR316.9 trillion and expenditure of IDR348.1 trillion.
He notes: “Several factors are driving lower-than-expected revenue; refunds according to the average effective rate scheme, lower commodities-related revenue, and taxpayers struggling with the rollout of the new core tax administration system.”
Pertaining to monetary policy, the market expects a hold on Bank Indonesia rate.
Jahja writes: “The US dollar index (DXY) has corrected to 103.3 vs 109.4 on 2 Jan, and inflation has been manageable. Thus, room for a surprise cut still persists to boost the economy. Overall, we anticipate macro to gradually improve in 2H2025 amid new policy rollouts. On state-owned banks, AGMs will be held next week and investors are closely watching the board appointments.”
On the sovereign wealth fund, Danantara, the analyst’s discussions with the Ministry of Finance points to initial funding being driven by SOE dividends worth IDR80 trillion to IDR90 trillion this year.
“Moreover, the government thinks future investments in commodities downstreaming projects, energy security, and food security could drive a cumulative around eight million new jobs,” writes Jahja.
Notably, Indonesia’s government is also planning for the military to have a wider role at ministries and institutions, from 10 to 16 roles.
The proposals also include amendments to the military command structure under the Defence Ministry, and could allow armed forces personnel to serve in more civilian positions.
The analyst writes: “2M2025 foreign equity outflows climbed to US$1.34 billion ($1.73 billion) already reversing FY2024 inflows of US$1.16 billion. Meanwhile, Mar 17-to-date outflows have reached around US$308 million. In contrast, government bonds booked inflows of around IDR22 trillion.”
