Indonesia Stocks in a Bubble, Central Bank Study Shows

Bank Indonesia is warning that local stocks are in a bubble and 
officials are prepared to put controls on capital inflows 
if needed to maintain financial stability

Indonesia’s stocks are in a bubble and officials are prepared to put controls on capital inflows if needed to maintain financial stability, the head of the central bank’s economic research and monetary policy division said.

“The actual stock price now is actually exceeding the fundamental value,” Perry Warjiyo, who was a member of the International Monetary Fund’s executive board before taking his current post in July 2009, said in an interview in Jakarta. “Whatever methodology we use‚“ shows an excess valuation, he said, citing Bank Indonesia studies over recent months.

Indonesia’s experience is echoed across emerging markets that are benefiting from international capital flows shunning slow-growing advanced economies. Brazil imposed a tax on foreign funds last year, while central banks from China to India have ordered their banks to hold more of their assets in reserve, and India and Malaysia have raised interest rates.

The Jakarta Composite index climbed to a record on Wednesday, closing at 2,898.58, and is the best performer among 20 Asia-Pacific benchmarks monitored by Bloomberg over the past 12 months, with a 143 percent return in U.S. dollar terms.

The JCI has climbed about 14 percent this year on anticipation of accelerating economic growth and after Standard and Poor’s upgraded the nation’s sovereign debt ratings.

“There is a bubble going on,” Warjiyo said. Bank Indonesia’s analysis shows the peak of the overvaluation was in July, with part of the deceleration owing to improved economic fundamentals, he said. The market has a “tendency of self-correction but we are‚“ continuing to monitor it, he said.

Deputy Governor Budi Mulya said in an e-mailed statement on Thursday that “the stock market performance in many ways does reflect the performance in the real economy.” The “economic outlook is definitely favorable as GDP growth soars and inflation moderates.”

Policy makers are also sensitive to risks of any reversal of capital flows, which could be triggered by a burst bubble, said Warjiyo, 51, who has a doctorate in monetary economics from Iowa State University in the US.

Bank Indonesia board members last year discussed the risks posed by an influx of foreign funds, and the bank studied the feasibility of imposing capital controls, Warjiyo said. For now, the bank is “confident” Indonesia can cope. Should they be applied, any capital controls would be “temporary,” he said.

Mulya said in his e-mail that the bank “reaffirms that there is no plan for capital control.” He also said the bank has a “cautious stance towards large capital inflow of late.”

Brazil’s government imposed a 2 percent tax on foreigners’ stock and bond purchases in October to stem the capital flows that helped send the real to a 34 percent gain against the dollar until that date last year. Since then the real has weakened 2.7 percent.

In China, policy makers are aiming to restrain speculation in the property market, and the central bank has twice ordered banks to raise the ratio of assets held in reserve.

Foreign investors are snapping up Indonesia’s stocks and bonds. They bought a net 4.9 trillion rupiah ($541 million) of shares in March after selling 1.6 trillion rupiah in the first two months of this year, according to data from the Jakarta stock exchange. Foreign holdings of Indonesian bonds rose to 133.7 trillion rupiah as of April 6, up from 108 trillion rupiah at the end 2009, according to Finance Ministry data.

The central bank’s assessment is in conflict with some fund managers.

“Valuations are probably fairly priced,” Raymond Gin, chief investment officer at PT Manulife Asset Management in Jakarta, said in a Bloomberg Television interview on March 25.

Shares aren’t “expensive” after recent gains, he said.

Companies may beat profit estimates, prompting Manulife to stay “overweight” on banks and carmakers, Gin said. The fund manager oversees about $2.3 billion in Indonesia. PT Bank Mandiri, Indonesia’s biggest lender by assets, and auto seller PT Astra International, the largest firm by market value on the Indonesian Stock Exchange, are among stocks Gin said he likes.

Investors are lured by signs of accelerating growth in Southeast Asia’s largest economy. Gross domestic product rose 5.4 percent in the final quarter of 2009, and the central bank anticipates the expansion will pick up to as fast as 6 percent this year and between 6 percent and 6.5 percent in 2011.

“Our macroeconomic conditions are still solid and that’s been driving foreign buying,” Soni Wibowo, vice president of PT Bahana TCW Investment Management, which manages about $1.7 billion in assets, said last month.

The rupiah has risen 3.7 percent this year, making it one of the top three gainers among the 10 most actively traded currencies in Asia. It has been No. 1 for the past 12 months, surging about 26 percent against the dollar.

The central bank considers the exchange rate in its monetary policy deliberations, Warjiyo said, including how it is affecting the financial industry, liquidity and the risk of nonperforming loans.

“We are not targeting the exchange rate but we are managing the volatility to smooth out any, you know, irrational volatility,” Warjiyo said.

Bank Indonesia is also reviewing the application of reserve requirements for the nation’s lenders, he said. Currently, banks are required to place 5 percent of their deposits at the central bank and set aside 2.5 percent in the form of expanded cash or bonds. Warjiyo said officials are considering linking the reserve amounts to firms’ loan-to-deposit ratios.


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