CLSA Central Bank governor said that they intend to maintain an exchange rate of about Rp9,000 to the US$.

Central Bank governor Darmin Nasution said that they intend to maintain an exchange rate of about Rp9,000 to the US$. This is in an effort to balance the interests of exporters and importers while maintaining overall economic stability.

At the same time, Indonesia forex reserves are a little bit over US$77bn (adding US$5bn in April alone), thanks to inflows and intervention by Bank Indonesia. Without Central Bank’s (expensive negative carry) intervention the rupiah exchange rate might be well below Rp9,000 by now.

We are no economist but our on the ground observation suggests that companies and most of the households in Indonesia continue to live within their means. Plus, there is now growing confidence that political stability and a lower cost of capital will deliver a secular growth story for Indonesia, driven by investment. Moreover, Indonesian Rupiah is still an underperforming currency in SE Asia and is still 20% below where it was a decade ago.

Last week, I met up with his friends working in private banking industry in Singapore. I learned that Indonesia continues to be a very difficult market for private banking these days, nothing like the heydays before 2008 credit crisis. Although banks are still hiring private bankers for Indo market but new hires are given only a few months to prove themselves (used to be a year or two before the crisis). It's just getting tougher and tougher to attract money from Indonesia to park in Singapore. Stories of super wealthy families suffering heavy/catastrophic losses mean the industry is not going to see big new money from Indonesia anytime soon. I mean who would still be buying these accumulators or structured products! This is especially true for the 2nd/3rd generations who now prefers to invest their money in Indonesia where there are lots of opportunities. This is bullish for Indonesian rupiah and assets.

Rupiah will eventually have to strengthen, in our view. Otherwise, we may see inflation and negative real lending rates. Buy Indonesian asset reflation stocks. OWT banks, property, and cement stocks. We like BMRI, SMRA, BSDE, and SMCB.