$76 Billion Fund Gives Contrarian Call for Indonesia Rate Cut

(Bloomberg) -- Indonesia’s central bank should signal interest-rate cuts to draw more foreign money into the nation’s bonds, according to a top emerging markets asset manager.

The current-account deficit will remain manageable and Bank Indonesia has room to reverse some of the rate hikes it implemented last year, Anil Kumar, who helps manage about $76 billion of funds at Ashmore Plc, said in an interview.

“We remain bullish on bonds as the interest-rate cycle has peaked,” Kumar said in Jakarta. “It’s a carry trade situation from now for Indonesia with a chance for the central bank to start cutting interest rates in the second half,” he said, referring to borrowing in another currency to invest in Indonesian assets.

$76 Billion Fund Gives Contrarian Call for Indonesia Rate Cut

Ashmore’s view isn’t widely shared with about half of economists surveyed this month predicting higher rates by the end of the year. The rest see no change and only one, United Overseas Bank Lt., forecast a cut.

All analysts in a separate survey predict the rate will be held at 6 percent on Thursday.

The central bank has signaled caution with Deputy Governor Dody Waluyo last week saying “economic stability is not negotiable” when asked in an interview about the possibility of easing the monetary stance. Bank Indonesia raised rates by 175 basis points last year, among the biggest increases in Asia, to fight an emerging-market selloff.

Attractive

Foreign funds are finding Indonesian government bonds attractive with a $2 billion inflow this year, compared with outflows in India, Thailand and Malaysia, according to most recent data. Just last week, total bids for the government’s bi-weekly bond auction totaled 66.4 trillion rupiah ($4.7 billion), the highest in 13 months.

Kumar predicts the yield on benchmark 10-year government debt could fall to 7.25 percent this year from about 8 percent now. While that would be the lowest since June, it would still be attractive compared to those in developed economies and even to its emerging-market peers in Asia.

“The bond market needs an additional catalyst for the front end of the curve to move lower and that can be done through a rate cut,” Kumar said. “A combination of increasing foreign-exchange reserves and rate cut can be good for most investors in 2019 and also the central bank.”

For now, Kumar said the fund raised its cash holding after the wider-than-expected January trade balance data released last week.

“This is a tactical move as there will be major events globally in March and in April, domestic election,” he said. “This is not a bearish outlook, but rather a tactical move.”

Lower oil prices are helping alleviate pressure on the current account, which was among the key vulnerabilities cited by investors. The deficit was 3.6 percent of gross domestic product in the fourth quarter.

Strong economic fundamentals also support demand for Indonesian assets, including easing inflation, faster economic growth, Kumar said. The currency has also recovered, the biggest gainer in Asia after the baht this year.

“Growth remains to be strong in Indonesia compared to other emerging markets,” he said. “This makes the country an ideal place for foreign investors to place bets on during the condition in which developed markets GDP growth start to slow down.”

©2019 Bloomberg L.P.