BNP Paribas January 2009 review

Macro economics
Bank Indonesia decided to cut its policy rate by 50bp to 8.75% on 7 January. With January another deflationary month, the market expects another cut of up to 50bp on 4 February. Inflation eased to 9.17% y-y in January, down from 11.1% y-y in December 2008 on the back of the 10% fuel price cut in mid-January. Lower interest rates are needed for investment to resume and banks to start lending. The government has proposed a revised budget for the year based on a 7.5% BI benchmark rate, lower economic growth of 4.5-5.5%, USD45/bbl oil price and IDR11,000/USD exchange rate.

Market development
Bakrie Group’s recent manoeuvres proved controversial. BUMI’s acquisition of three mining-contracting and coal-mining companies, totalling USD565m, have led to many downgrades on the stock.Moreover, despite its intention to stop the transactions, the capital market regulators conceded that it would be difficult to prove any violations due to the loopholes in the current regulations. Additionally, Bakrie & Brothers (B&B) managed to restructure its huge debts with Northstar, which will own up to 31% of B&B's stake. B&B will still retain the majority stake in BUMI following the debt restructuring, with 27% stake, down from 35%.This raised questions on how B&B was able to secure a deal in reducing its debt drastically and lose only a small portion of BUMI.

Concerns over Bank Danamon’s losses from its forex structured product sent the share price down 11% on 20 January. In contrast, Bank Negara Indonesia (BBNI) was the star performer in the banking sector, up 13% in January. Investors were enticed by the bank’s undeserved valuation, which at 2009 P/BV of 0.6x was the cheapest in our bank universe. Even if BBNI’s NPLs were to double to 15.5% and coverage ratio stays at
105%, the stock would still be trading at its adjusted book value.

Interest on CTRA and INCO returned in January with the expected further reduction in interest rates and improvement in nickel price, which reached the bottom in early December. ASII was supported by renewed interest in the CPO counter, as well as positive sentiment on interest rate reduction, fuel prices and the plan to cut the luxury tax on cars.