The Indonesian Rupiah has been one of the worst stores of value since 1949. From 1 rupiah to 1 Dutch guilder (whose value was 3.8 US dollar), the rupiah has depreciated to nine million today after a series of hyperinflation and devaluation.
Nick Cashmore in his latest strategy report points out that there has been a vast improvement in the country’s financial position over the past decade. Indonesia has gone from the most indebted to one of the least indebted countries in Asia as both public and private balance sheets have used an improvement in cashflow to reduce risk. As a whole, Indonesia has run current account surpluses every year for the past ten. This is really a stark contrast to not only the history of policies in Indonesia but also increasing to the fundamentals of economies in the west.
The report points out that Indonesia policymakers now facing great challenges from sterilizing fund flow in the face of a tsunami of cash seeking higher returns with solid fundamentals (this is a good problem to have). This would mean pushing down the yield curve of Indonesia IDR bonds, effectively lower the cost of doing business here. Esp bullish for infrastructure projects bidding on fixed IRR basis. Our top pick here Jasa Marga. However, this flock of money will limit the ability of central bank to sterilize flow. As such, it will leave BI no choice but have the nature law of supply/demand work, that is to let the Rupiah appreciate.
A sustained rise in the value of the rupiah would improve consumer purchasing power and boost living standards;
Companies with balance sheet leverage to a higher rupiah include Holcim, Indofood, AKR and Telkom Indonesia.
Operating margins for consumer companies have dropped by a third over the last five years. A higher rupiah would help restore purchasing power.
Unilever Indonesia, Kalbe Farma and Indofood all have significant operating leverage to the rupiah.
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