Budi Frensidy: High inflation dampens investor optimism


High inflation dampens investor optimism

By: Prof. Dr. Budi Frensidy – Professor of FEB UI

KONTAN – (25/7/2022) The Indonesian economy in 2021 closed with praise. The three leading economic indicators are all encouraging. Economic growth increased from minus 2.1% in 2020 to +3.7% in 2021.

The inflation rate remained below 2%, and the rupiah exchange rate stabilized at IDR 14,263 per US dollar. Not to be left behind, the realization of exports, trade balance, and realization of state revenue also recorded the best figures.

After being in the top 30 in the world in 2011, with exports reaching US$ 203.6 billion, Indonesia’s exports again broke the sacred mark of US$ 200 billion and ranked 27th globally. The export value reached US$ 231.5 billion throughout 2021.

The trade balance surplus also shot up to US$ 35.3 billion, the highest since 2006. The current account also surpassed US$ 3.3 billion, the first surplus after ten years of deficit. In line with the above performance, the realization of state revenue also exceeded for the first time in 12 years, namely 115.4% at IDR 2,011.3 trillion for 2021.

With such a sound economic report card, stock investors are looking forward to 2022 with optimism. In less than four months, the JCI shot up to 7,276, exceeding the increase in the index throughout 2021, which was only about 10.1%.

Stock investors and analysts agree that the JCI has a great chance of touching the 7,500 level by the end of the year. With the normalization of community mobility after the pandemic, it is only natural that stock investors predict this year’s JCI performance will be better than in 2021.

If other countries are still messing around with rising energy and food prices, Indonesia as the world’s leading producer of coal and crude palm oil (CPO), is among those who have benefited greatly. The prices of both commodities have continued to record all-time highs since the global supply chain disruption due to the pandemic, which was exacerbated by the outbreak of the Russia-Ukraine war in late February 2022.

If we compare it with 2018, the price of Brent crude oil had risen 186%, natural gas shot up 285%, and coal jumped 385%. Likewise, the prices of food commodities such as wheat, soybeans, and palm oil rose by more than 200%.

The net profit of dozens of coal and palm oil corporations skyrocketed. Some even set record highs. However, the domestic market obligation (DMO) policy in February 2022 and then the domestic price obligation (DPO) for the palm oil industry put a damper on the prospects of dozens of palm oil companies in this country.

Just so you know, previously, CPO exporters were already subject to an export duty of US$ 200 per ton and an export levy of up to US$ 375 per ton when the price was US$ 1,500. After the US$ 575 cut per US$ 1,500 export, DMO and DPO, on April 28, there was another CPO export ban, so the palm oil industry seemed to have fallen down the stairs.

The fate of millions of oil palm farmers was also affected, as the price of their Fresh Fruit Bunches (FFB) fell below IDR 1,000. Typically, it is Rp 2,000-Rp 3,000 per kilogram.

As a result of the above palm oil export ban, the world CPO price exceeded RM 7,000 per ton. Nevertheless, only Malaysian exporters enjoyed it. Meanwhile, Indonesian palm oil companies and farmers can only bite their fingers to watch it.

Fortunately, palm oil exports were reopened at the end of May, and export levies were removed until August 2022. The hope was that CPO and FFB prices could return to normal.

In reality, lifting the export ban and removing the export levy is too late and too little. CPO stocks in palm oil companies’ warehouses have reached 10 million tons, far above the standard two million-3 million tons.

Some companies have been forced to store their stocks on floating vessels. The abundant supply has caused CPO prices to fall 45% from their high. Perhaps only at the end of the year will CPO and FFB prices stabilize, in line with the expectations of palm oil producers and farmers.

If the palm oil industry is unlucky, the coal industry and other Indonesian mainstay commodities are continuing their glory until now. Indonesia’s exports and trade balance surplus in the first semester of 2022 again set a record in history, amounting to US$ 141.2 billion, ranked 25th in the world, with a surplus of US$ 24.9 billion.

The trade balance surplus for 26 months continuously is also unprecedented. The realization of state revenue in the year’s first half also reached IDR 1,317.2 trillion, or 58.1% of the 2022 target of IDR 2,266.2 trillion.

Ironically, most countries worldwide are experiencing high inflation due to soaring energy and food prices. The United States experienced the highest inflation in 40 years, reaching 9.1% annually at the end of June. That is 4-5 times their average inflation rate.

The UK’s inflation also reached 9.1%, and the EU’s 8.6%. Brazil’s inflation was 11.9%, Russia’s 15.9%, Turkey’s 78.6%, and Venezuela’s even shot up 167%. As a result, almost all countries raised their interest rates.

For example, the Fed’s interest rate has risen three times from 0.25% at the beginning of the year to 1.75% now and is expected to be raised again to 3.25% by the end of the year. Only a few countries, including Indonesia, are still maintaining their benchmark interest rates.

Rising interest rates and discount rates will eventually change the valuation of all assets, including stocks. That is what happened with stock indices in many countries.

According to KONTAN’s daily notes last week, of the 11 stock exchanges compared, ten experienced a decline in the stock index since the beginning of the year, year to date (YTD), of 0.9% to 21.3%, namely the Malaysian, Philippine, Singaporean, Thai, Vietnamese, Chinese, Hong Kong, Japanese, American and British exchanges. Only the Jakarta Composite Index (JCI) was still positive by 4.6% until the end of last week.

If the JCI currently has difficulty staying above 7,000, it is because the US dollar exchange rate has broken Rp 15,000, along with capital outflows. The weakening of the rupiah to Rp 15,000 per US dollar is average and still better than the depreciation of other currencies. Therefore, I believe the JCI will return to 7,300 when foreign capital inflows turn around.

Source: Kontan Newspaper. Edition: Monday, July 25, 2022. Exchange Rubric – Wake Up Call. Page 4.