December 08, 2024

Easing Inflation and Appealing Real Yield

Market Commentary

0 comments

Indonesia's inflation remains notably controlled compared to many other emerging and developed economies. As of 2024, Indonesia's inflation rate is projected to be around 3.67%, significantly lower than the global average of 5.4 - 5.8% according to IMF. This stability is largely attributed to robust government policies, such as subsidized energy prices, which shield domestic markets from volatile global energy costs. In contrast, other emerging markets like Turkey (54.3%) and Argentina (69.5%) are grappling with much higher inflation rates due to monetary instability and geopolitical challenges.

Globally, inflation has been declining, driven by tighter monetary policies and lower energy prices. For example, advanced economies such as the U.S. (approximately 4.2%) and the EU (5.5%) have seen some relief, though their rates remain elevated compared to pre-pandemic levels. Indonesia’s relatively moderate inflation provides an edge in maintaining economic stability and attracting investments compared to peers facing persistent price pressures.

In November, Indonesia's annual inflation rate eased to 1.55%, marking its lowest level since July 2021. While headline inflation has declined, core inflation has risen for the fifth consecutive month, reaching 2.26% YoY. To address weakening demand, our economist team expect a 25 basis points rate cut in December by Bank Indonesia, which in our view is in line with the ongoing monetary easing projected to continue through 2025. Additionally, Indonesian real yields remain appealing.

Indonesia's Inflation Rate

Our economist team also noticed that over the past five years, a positive correlation has been presence between real yields and the rupiah, with higher real yields contributing to rupiah appreciation. Elevated real yields attract both foreign and domestic investors to rupiah-denominated assets, such as Indonesian government bonds. Notably, the last time real yields reached a comparable level, the rupiah traded at approximately IDR 14,300 per USD.

Indonesia’s current real yield, which is relatively high compared to other countries, positions its market as an attractive destination for investors seeking strong returns. This yield differential is likely to drive foreign capital inflows into Indonesian bonds and other rupiah-denominated assets, providing support for the rupiah and bolstering the bond market.

USD IDR Exchange Rate vs. Real Yield

In comparison to economies with lower or negative real yields, Indonesia offers compelling opportunities, especially in a global environment characterized by moderate inflation and easing monetary policies. This advantage may strengthen investor sentiment toward Indonesian assets, enhancing liquidity in the local markets.

Indonesia 10 Year Bond Yield vs. US Treasury Yield

While also taking into account global risks such as fluctuations in U.S. Treasury yields or geopolitical tensions, we anticipate that foreign inflow may start to come back to Indonesia towards stocks which has experienced heavy outflow such as the big banks.

Comments

December 26, 2024

December 23, 2024

December 22, 2024