The Indonesian stockmarket and the IDR dropped this morning on news that Sri Mulyani will take up a new role with the World Bank. Please see comment from Nick Cashmore below.
Incredibly, this news came out via a press release by the World Bank, since confirmed by Sri Mulyani, but without any comment from the government.
Indonesia's well regarded Finance Minister has served in her role since 2005 and is credited with providing macro economic stabilty, in particular guiding Indonesia through the economic crisis, and leading the fight against institutionalised corruption. She has been considered a leading proponent of the reform agenda.
On her watch, government spending was prudently managed such that public debt to GDP fell, tax rates were cut but the tax base was widened and corruption was not tolerated. Most recently, however, Sri Mulyani came under fire from various political elements over her handling of Bank Century, a small regional bank that was bailed out during the crisis at an exorbitant cost to the government. As mentioned, Sri Mulyani has been a leading agent of institution building in the country, and yet this process also cannot be dependent on one person. It requires a cultural shift in attitudes by the nation at large. In this writer's opinion, this generational shift is underway, but will be a long process.
Moreover, much of the macro economic gains made in recent years look secure and the country is still on track to achieve investment grade status within 15 months. President SBY must now reaffirm his commitment to the reform agenda, in which voters gave him an overwhelming mandate last year to pursue, by appointing a credible Finance Minister who will maintain the support of the market. Anggito Abimanyu, the deputy minister of finance, will be one candidate along with Agus Martowardojo, the president director of Bank Mandiri and possibly Gita Wirjawan, the head of BPKM.
After a dramatic run where Indonesian stocks have reached an all-time high in USD terms and are the best performing in Asia, this will be construed as an opportunity for investors to lock in profits until there is more certainty as to future policy direction.
In our view, a tactical correction is understandable, indeed healthy, but the strategic reasons to be OWT Indonesian assets remain valid.
Indonesia is moving away from a cyclical, commodity-based deleveraging story to one where growth is driven by secular investment and job creation. GFCF/GDP has reached the highest in two decades and wheil GDP growth averaged 5.1% for the past decade, we forecast an average of 6.7% for this year and next. Valuations may also have reverted to the mean but are far from stretched.
Our high quality blue chip stocks remain ASII, BBCA, ADRO, INTP, BMRI, and PGAS.
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