Douglas Appell – The rupiah's collapse from late last year accelerated the economic and political turmoil that knocked Indonesia off the map of global stock investors. Is the currency's recent rebound bringing it back?
It is helping. After plunging from 2,450 rupiah to the dollar in mid-1997 to between 12,000 rupiah and 17,000 rupiah for much of this year, the Indonesian currency strengthened this week to roughly 8,650 rupiah to the dollar. "If the rupiah continues to hold these levels, it will do a lot for confidence," says Pek Swan Teo Layanto, the president director of PT Schroder Investment Management Indonesia.
Investors who have kept Indonesia at arm's length this year say they have begun dipping a toe or two into Jakarta's still-turbulent waters.
The Indonesian market "is coming back on to radar screens," says Gary Greenberg, who runs Van Eck Global Asset Management's emerging-markets funds out of New York. Another fund manager, who in the last two weeks has made her first foray into Jakarta this year by parking 2% of her portfolio there, says, "People have to put money in the region and they don't have that many choices."
Economic concerns remain
But for now a few toes are more than enough exposure for most investors. "We actually bought a little bit" in Indonesia recently, says Matt Linsey, an Asian specialist with Baring Asset Management in London. The country has some decent-size, focused companies that "you can explain what they do in less than a minute," unlike the octopus-like conglomerates found so often in Asia, he says. Unfortunately, Indonesia's macroeconomic situation remains horrific, he says.
With the economy contracting at a 17% clip in the third quarter, compared with a year earlier, and a political situation that may remain in flux until a general election set for May, uncertainty will keep most investors at bay, analysts predict.
Moreover, some pessimists note that the rupiah's surge partly reflected fears that Indonesia could follow Malaysia in imposing capital controls preventing foreign investors from taking their money out of the country. Indonesian officials have denied such controls are looming. One Hong Kong-based investor says his investment house is using the rupiah's rise as a window of opportunity to cash in its Indonesian holdings and get out at a relatively good exchange rate.
Compelling valuations
Those capital-control fears helped spark an across-the-board sell-off by foreign holders of Indonesian blue-chip stocks in September that knocked down their prices to tempting levels. "Indonesia got on to our radar screens last month because the valuations were becoming compelling," says Christopher Lively, a Boston-based portfolio manager of the Pioneer Indo-Asia Fund, which picked up some "small positions in selected stocks."
Similar sentiments helped the key Jakarta stock-market index surge 18% over the past week and a half. But even recent buyers are under no illusions about the country's outlook. "I would caution against excess euphoria," Pioneer's Mr. Lively says, "because the recent rally was based in part on a stronger yen" which could easily weaken again. "The downside risks outweigh the upside potential" for now, he says.
"It's impossible to get enthusiastic," agrees Van Eck's Mr. Greenberg. It's simply a matter of Indonesian stocks being so beaten down that "a small position in a few good companies might make sense," he says.
Talk of intervention?
Whether or not Jakarta's market can move beyond being a token presence in regional portfolios will be affected by the rupiah's ability to hold its ground. Talk that the government has been intervening in the thinly traded currency market to keep the rupiah strengthening to the 8,000 level has left many analysts expecting the currency to weaken again. The rupiah's surge in the last two weeks has been beyond expectations and is hard to justify in terms of economic fundamentals, says one senior analyst who predicts the dollar will recover to fetch 10,000 rupiah by the end of the year. Another analyst says the dollar could end the year as high as 12,000 rupiah.
The poor response to this week's issue of short-term paper by Indonesia's central bank, which attracted just over half of the total funds it had hoped to raise despite offering almost 60% annualized returns, suggests that many foreign investors also believe the rupiah is poised to weaken again, observers say.
But some analysts believe the rupiah will be able to maintain its recent gains. As long as the dollar doesn't jump back to 140 yen or more from Thursday's level of about 118 yen, the inflow of money from official lenders such as the International Monetary Fund should continue to support the rupiah, says Andrew Dermot Fung, regional treasury economist with Standard Chartered Bank in Singapore. It is possible that the rupiah could stand at 8,000 to the dollar or stronger by year-end, he says.
Bill Belshere, the head of fixed-income research with Merrill Lynch in Singapore, agrees. With Indonesia running a strong trade surplus and receiving inflows from multilateral lenders as well as a little foreign direct investment, there is "a very good chance" that the rupiah could stabilize in the 8,000 to 9,000 range, he predicts.
Return of business
If the rupiah can hold between 8,000 and 10,000, it will help pave the way for business activity to resume in Indonesia, says Schroder's Ms. Teo Leyanto. More companies that investors had pegged at liquidation value could then be valued as going concerns, she says.
Merrill Lynch's research chief in Jakarta, Alex Wreksoremboko, says he remains fairly cautious, recommending only a few select exporters such as fisheries company Daya Guna, paper company Indah Kiat or plantation concern Astra Agro Lestari. Most blue-chip stocks will begin to look expensive if they rise more than 10% or so from current levels, he says.
Ms. Teo Leyanto says several leading exporters and blue-chip stocks still look attractive now. And if a stronger rupiah does get Indonesia's financial blood flowing again, some domestic consumption-related stocks may become interesting again, she says.