Indonesia Strategy

Strategy Update | 14 August 2020

JCI Performance
3M 6M 12M
Assessing debt monetization impact
Absolute 16.3% -10.6% -16.1%  The burden sharing scheme (debt monetization) may add additional
Rp400tr/c.6% to current M2. First issuance (Rp82tr) was last week.
5%
0%
 It seems that Rupiah was weakening post settlement date (10 Aug)
-5% despite weaker dollar. Though we think this may only be temporary.
-10%
 We think Rupiah will be hovering at around this level given the ample
-15%
-20%
room for sterilization and FX reserve. We keep our JCI target unchanged.
-25% Burden sharing scheme = higher M2
-30%
-35%
Last month, BI and Government (through MoF) have agreed on the financing
-40% scheme (c.Rp903tr/5.7% of GDP) to help to restart the economy. Part of it
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
(c.Rp398tr/6% of additional M2) will be done through private placement to BI
JCI Index
with 0% interest rate bond (MoF pays RR rate but BI shall refund it back).
Just recently (last week) MoF has issued Rp82tr of bonds through private
placement with settlement date on 10 Aug.
Costs of debt monetization; M2/FX reserve ratio at its avg in US$ terms
We think there shall be two implications of debt monetization: 1) weaker
currency (due to rising M2/FX reserve ratio) and 2) higher inflation, though
this may not materialize amid weak economic growth. We try to gauge the
impact of debt monetization to Rupiah using M2 to FX reserve ratio - the
higher the ratio, the lesser trust placed by residents towards the currency.
Indeed our observation suggested that in times of crisis (2005/08/15/18) the
ratio rose up in-line with Rupiah depreciation, all because of lower FX
reserve. We think it will be different this time around considering the ample
FX reserve (of US$135bn – all-time high).
Room for sterilization remains ample
During period of rising either M2 or FX reserve, BI will sterilize through open
market operation to neutralize the impact (i.e. issuing more SBI). The cost of
this is potentially a higher rate but we don’t think it may materialize due to: 1)
balance of total OMO/M2 is at 7% (vs. peak of 21%), 2) robust deposit growth
(vs. loan growth) and 3) relatively ample secondary reserves.
Impact to Rupiah shall be manageable; maintain our JCI target
Along with persistently high Covid positivity rate (link to our previous note),
currency is also playing a big part towards overall JCI performance. If we
compare to other countries, the size of QE in Indonesia (6/15% of M2/central
bank assets) is relatively mild vs. USA (13/33%)/EU (10/22%). Ample FX
Jovent Muliadi reserve and BI’s ability to sterilize the excess liquidity impact shall suffice to
PT Indo Premier Sekuritas contain the debt monetization impact. Maintain our index target of 5,400 with
jovent.muliadi@ipc.co.id cyclical names as our picks.
+62 21 5088 7168 ext. 710 Fig. 1: US$/IDR vs. DXY MTD – decouple happened post settlement of the private
placement bond
102%
Timothy Handerson Rebased - month to date
101%
PT Indo Premier Sekuritas 101%
timothy.handerson@ipc.co.id 100%

+62 21 5088 7168 ext. 714 100%

99%
99%
Anthony
1-Aug-20
2-Aug-20
3-Aug-20
4-Aug-20
5-Aug-20
6-Aug-20
7-Aug-20
8-Aug-20
9-Aug-20
30-Jul-20
31-Jul-20

10-Aug-20
11-Aug-20
12-Aug-20
13-Aug-20

PT Indo Premier Sekuritas

anthony@ipc.co.id US$/IDR exchange rate (re-based) DXY (re-based)
+62 21 5088 7168 ext. 715
Source: Bank Indonesia, Bloomberg, Indo Premier

Refer to Important disclosures in the last page of this report

 14 August 2020
Strategy Update

Burden sharing scheme = higher M2

Last month, BI and Government (through MoF) have agreed on the financing
scheme (c.Rp903tr/5.7% of GDP) to help to restart the economy. Part of it
(c.Rp398tr/6% of additional M2 – intended for public goods financing as
shown in figure 2) will be done through private placement to BI with 0%
interest rate bond (MoF pays RR rate but BI shall refund it back). Just
recently MoF has issued Rp82tr of bonds through private placement.
th
At a glance, post issuance of this bond (the issuance was 6/7 of Aug, but
th
settlement date was on 10 of Aug) Rupiah depreciated despite weaker
dollar (figure 4). Most were worried whether this trend may persist in the
long-run considering the sheer size of issuance (Rp82tr only accounts for
20% of total private placement bond).

Fig. 2: Summary of burden sharing scheme between BI and MoF

Bond issuance
Budget type Issuance schem e Interest rate Burden sharing
size (Rp tr)
BI to fully bear the interest expenses
BI w ill directly purchase 7-day reverse
Public Goods 398 (Govt w ill pay 7DRRR, w hich w ill be
bond from govt repo rate
transferred back by BI)
Non-Public Goods (MSME) 123 BI pays the difference betw een market
Market mechanism Market rate
Non-Public Goods (non-MSME) 53 rate and up to 7DRRR - 1%
Government pay 100% of interest
Others 329 Market mechanism Market rate
expenses
Total 903
Source: MoF, Indo Premier

Fig. 3: US$/IDR vs. DXY YTD – decouple happened amidst news of Fig. 4: US$/IDR vs. DXY MTD – decouple happened post settlement
MoF request to BI on burden sharing of the private placement bond
125% Rebased - year to date 102% Rebased - month to date
120% 101%
115%
101%
110%
100%
105%
100% 100%

95% 99%
90% 99%
31-Dec-19

7-Jul-20
5-May-20
12-May-20
19-May-20
26-May-20
7-Jan-20
14-Jan-20
21-Jan-20
28-Jan-20

2-Jun-20
9-Jun-20

14-Jul-20
21-Jul-20
4-Feb-20
11-Feb-20
18-Feb-20

7-Apr-20

16-Jun-20
23-Jun-20
30-Jun-20
3-Mar-20

14-Apr-20
21-Apr-20
28-Apr-20

28-Jul-20
10-Mar-20
17-Mar-20
24-Mar-20
31-Mar-20

4-Aug-20
11-Aug-20
25-Feb-20

US$/IDR DXY US$/IDR exchange rate (re-based) DXY (re-based)

Source: Bank Indonesia, Bloomberg, Indo Premier Source: Bank Indonesia, Bloomberg, Indo Premier

Page 2 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

Cost of debt monetization; M2/FX reserve

ratio at its avg in US$ terms
We think there shall be two implications of debt monetization: 1) weaker
currency (due to rising M2/FX reserve ratio) and 2) higher inflation, though
this may not materialize amid weak economic growth.
We try to gauge the impact of debt monetization to Rupiah using M2 to FX
reserves ratio - the higher the ratio, the lesser trust placed by residents
towards the currency. Indeed our observation suggested that in times of
crisis (2005/08/15/18) the ratio rose up in-line with Rupiah depreciation,
mostly due to lower FX reserve.
We think it will be different this time around considering the ample FX reserve
(of US$135bn – all-time high) which allows BI to intervene the exchange rate
if needed.
At the same, M2 to FX reserve ratio (in US$ terms) also at its long term
average which implies relatively similar trust by residents towards the
currency – this also means that BI may not undertake drastic action in the
imminent future, in our view.

Fig. 5: M2 to FX reserves in US$ terms (at its LT average) vs. USD/IDR – negative
correlation between M2/FX reserve to currency
0.7 30%

0.6 20%

0.6
10%
0.5
0%
0.5
-10%
0.4
-20%
0.4

0.3 -30%

0.3 -40%
Feb-07

Feb-12

Feb-17

May-18

Jun-20
Jan-05
Jun-05

May-08

Jun-10

May-13

Jan-15
Jun-15
Apr-06

Jul-07

Oct-08

Jan-10

Jul-12

Oct-13

Jul-17

Oct-18

Jan-20
Aug-04

Nov-05

Sep-06

Dec-07

Aug-09

Nov-10
Apr-11
Sep-11

Dec-12

Aug-14

Nov-15
Apr-16
Sep-16

Dec-17

Aug-19
Mar-04

Mar-09

Mar-14

Mar-19

M2 to FX reserves in US$ (x) Average M2 to FX reserves in US$ (x) USD/IDR yoy% (RHS)

Source: Bank Indonesia, Bloomberg, Indo Premier

Note: negative US$/IDR yoy = rupiah depreciation (vice versa)

Fig. 7: FX reserves yoy% vs. USD/IDR exchange rate – spike in M2

Fig. 6: M2 yoy% vs. USD/IDR exchange rate yoy%
to FX reserve ratio largely due to lower FX reserves
25% 30% 70% 30%

20% 60% 20%

20% 50%
10% 10%
40%
15% 0% 0%
30%
-10% 20% -10%
10%
10%
-20% -20%
5% 0%
-30% -30%
-10%
0% -40% -20% -40%
Feb-13
Jan-14
Jan-03

May-10
Dec-03
Nov-04
Oct-05

Jul-08
Jun-09

Apr-11

Oct-16

Jul-19
Jun-20
Sep-06
Aug-07

Dec-14
Nov-15

Sep-17
Aug-18
Mar-12

Jun-14
Jun-05

Jun-08

Jun-11

Sep-16
Jun-17

Jun-20
Dec-03
Sep-04

Dec-06
Sep-07

Mar-09
Dec-09
Sep-10

Dec-12
Sep-13

Dec-15

Dec-18
Sep-19
Mar-06

Mar-12

Mar-15

Mar-18

M2 yoy% USD/IDR yoy% (RHS) FX reserves yoy% USD/IDR yoy% (RHS)

Source: Bank Indonesia, Bloomberg, Indo Premier Source: Bank Indonesia, Bloomberg, Indo Premier
Note: negative US$/IDR yoy = rupiah depreciation (vice versa)

Page 3 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

Fig. 8: FX reserves in US$bn – current FX reserves at all time high

140 135

130

120

110

100

90

80

70

60
Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20

FX reserves (US$ bn)

Source: Bank Indonesia, Bloomberg, Indo Premier

Room for sterilization remains ample

During period of rising either M2 or FX reserve, BI will sterilize through open
market operation to neutralize the impact (i.e. issuing more SBI) – the
correlation was reflected in fig 9 and 10.
 For example: MoF issued global bonds which resulted in higher FX
reserves in BI, at the same time MoF will then disburse the Rupiah to
fund the Government spending (higher M2). To neutralize such impact,
BI will be issuing more bonds (SBI) to absorb liquidity (as reflected in
higher open market operations balance).
The cost of the sterilization is potentially a higher rate, but so far the
sterilization has never resulted in higher rate at least in the past 5 years (we
use both 10Y and JIBOR).
Concurrently, room for liquidity absorption remained ample as: 1) balance of
overall open market operations (OMO) to M2 is at 7% (vs. peak of 21%), 2)
higher deposit growth of +9% yoy/+3% ytd (vs. loan growth of +3% yoy/-1%
ytd) and 3) ample secondary reserves – banks (under our coverage)
secondary reserves as % of its total funding stood at 18% (vs. 3Y/5Y mean
of 19%).

Fig. 10: FX reserves vs. open market operations – when FX reserves

Fig. 9: M2 vs. open market operations
rise, BI will sterilize through open market operations
23% 150% 70% 150%
21% 60%
19% 100% 50% 100%
17% 40%
15% 50% 50%
30%
13%
20%
11% 0% 0%
9% 10%
7% -50% 0% -50%
5% -10%
3% -100% -20% -100%
Feb-07

Feb-12

Feb-17
Dec-07

Dec-17
Nov-05

Feb-07

Nov-10

May-13

Nov-15

May-08
Oct-08

Jun-10

May-13

May-18

Jan-20
May-08

Feb-12
Dec-12

Feb-17

May-18

Jan-05
Jun-05

Jul-07

Jul-12

Oct-13

Jul-17

Oct-18
Jan-10
Jun-10

Jul-12

Jan-15
Jun-15

Nov-05
Apr-06

Dec-07

Aug-09
Jan-10
Nov-10
Apr-11

Dec-12

Jan-15
Jun-15
Nov-15
Apr-16

Dec-17

Jun-20
Jan-05
Jun-05
Apr-06

Jul-07

Oct-08

Apr-11

Oct-13

Apr-16

Jul-17

Oct-18

Jan-20
Jun-20

Sep-06

Mar-09

Sep-11

Mar-14
Aug-14

Sep-16

Mar-19
Aug-19
Sep-06

Mar-09
Aug-09

Sep-11

Mar-14
Aug-14

Sep-16

Mar-19
Aug-19

M2 yoy% Open market operations 3MMA yoy% (RHS) FX reserves yoy% Open market operations 3MMA yoy% (RHS)

Source: Bank Indonesia, Bloomberg, Indo Premier Source: Bank Indonesia, Bloomberg, Indo Premier

Page 4 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

Fig. 11: OMO as % of M2 vs. USD/IDR yoy% - current open market Fig. 12: Open market operations yoy% vs. USD/IDR yoy%
operation balance (as % of M2) remained relatively benign
25.0% 40.0% 150.0% 40.0%
30.0% 30.0%
20.0% 100.0%
20.0% 20.0%

15.0% 10.0% 50.0% 10.0%

0.0% 0.0%
10.0% -10.0% 0.0% -10.0%
-20.0% -20.0%
5.0% -50.0%
-30.0% -30.0%
0.0% -40.0% -100.0% -40.0%

Feb-07

Feb-12

Feb-17
May-08

May-14

May-20

May-08

May-13

Jan-15

Jul-17
May-18

Jun-20
May-06

May-10

May-12

May-16

May-18

Jan-05
Jun-05

Jul-07

Oct-08

Jul-12

Oct-13

Oct-18
Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Jan-15

Jan-17

Jan-19

Nov-05
Apr-06
Sep-06

Dec-07

Aug-09
Jan-10
Jun-10
Nov-10
Apr-11

Dec-12

Jun-15
Nov-15
Apr-16

Dec-17

Jan-20
Mar-09

Sep-11

Mar-14
Aug-14

Sep-16

Mar-19
Aug-19
Sep-05

Sep-07

Sep-09

Sep-11

Sep-13

Sep-15

Sep-17

Sep-19
OMO as % of M2 USD/IDR yoy% (RHS) Open market operations 3MMA yoy% USD/IDR yoy% (RHS)

Source: Bank Indonesia, Bloomberg, Indo Premier Source: Bank Indonesia, Bloomberg, Indo Premier

Fig. 13: Open market operations yoy% vs. JIBOR – sterilization Fig. 14: Open market operations yoy% vs. Indo 10-year bond yield
activity has never caused a spike in rate (at least in the past 5Y)
150.0% 16.0% 150.0% 18.0%

14.0% 16.0%
100.0% 100.0%
14.0%
12.0%
50.0% 50.0% 12.0%
10.0%
0.0% 0.0% 10.0%
8.0%
8.0%
-50.0% 6.0% -50.0%
6.0%

-100.0% 4.0% -100.0% 4.0%

Nov-05

Nov-05
Feb-07
Dec-07

Nov-10
May-08

Feb-12
Dec-12

Nov-15
May-13

Jun-15

Feb-17
Dec-17
May-18

Feb-07
Dec-07

Nov-10

Nov-15

Dec-17
May-08

Feb-12
Dec-12
May-13

Jun-15

Feb-17

May-18
Jan-05
Jun-05

Jul-17

Jan-20
Jun-20

Jan-05
Jun-05
Apr-06

Jul-07

Oct-08
Aug-09
Jan-10
Jun-10
Apr-11
Sep-11
Jul-12

Oct-13

Jan-15

Apr-16

Oct-18

Apr-06

Jul-07

Oct-08
Aug-09
Jan-10
Jun-10

Jan-15

Jul-17
Apr-11
Sep-11
Jul-12

Oct-13

Apr-16

Oct-18

Jan-20
Jun-20
Sep-06

Mar-09

Mar-14
Aug-14

Sep-16

Mar-19
Aug-19

Sep-06

Mar-09

Mar-14
Aug-14

Sep-16

Mar-19
Aug-19
Open market operations 3MMA yoy% JIBOR (RHS) Open market operations 3MMA yoy% Indo 10-year bond yield (RHS)

Source: Bank Indonesia, Bloomberg, Indo Premier Source: Bank Indonesia, Bloomberg, Indo Premier

Fig. 15: Open market operations yoy% vs. banks’ secondary reserves as % of total
liquidity – banks secondary reserves remained relatively ample
80.0%
70.0% 22.0%
60.0%
21.0%
50.0%
40.0%
20.0%
30.0%
20.0% 19.0%
10.0%
0.0% 18.0%
-10.0%
17.0%
-20.0%
-30.0% 16.0%
-40.0%
-50.0% 15.0%
May-11

May-12

May-13

May-14

May-15

May-16

May-17

May-18

May-19

May-20
Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Open market operations 3MMA yoy% Banks secondary reserves as % of banks' total liquidity 3MMA (RHS)

Source: Bank Indonesia, OJK, Indo Premier

Page 5 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

Fig. 16: Banking industry loan vs. deposit growth – stronger deposit Fig. 17: Open market operations as % of M2 – still below its long
growth in the last 3 months term average of 11%
30% 25.0%

25% 20.0%
20%
15.0%
15%
10.0%
10%

5% 5.0%

0% 0.0%
May-14

May-15

May-16

May-17
May-10

May-11

May-12

May-13

May-18

May-19

May-20
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20
Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Jun-05

Jun-07

Jun-09

Jun-11

Jun-13

Jun-15

Jun-17

Jun-19
Feb-06

Feb-08

Feb-10

Feb-12

Feb-14

Feb-16

Feb-18

Feb-20
Oct-14
Oct-06

Oct-08

Oct-10

Oct-12

Oct-16

Oct-18
Deposit growth yoy% Loan growth yoy% OMO as % of M2 Average

Source: OJK, Indo Premier Source: Bank Indonesia, Indo Premier

Along with persistently high Covid positivity rate (link to our previous note),
currency is also playing a big part towards overall JCI performance. If we
compare to other countries, the size of QE in Indonesia (6/15% of M2/central
bank assets) is relatively mild vs. USA (13/33%)/EU (10/22%).
Ample FX reserve and BI’s ability to sterilize the excess liquidity impact shall
suffice to contain the debt monetization impact. Maintain our index target of
5,400 with cyclical names (especially the banks) as our picks.

Fig. 18: Summary of bond buying program of peer countries Indonesia’s bond buying
program (Rp400tr/US$28bn) is relatively mild compared to US and EU
Central bank bond buying program

Central As % of
Budget
in US$ bn bank M2 central bank As % of M2
(US$ bn)
assets assets

USA 7,009 18,044 2,300 33% 13%

European Union 7,003 14,608 1,525 22% 10%
Japan 1,670 10,000 740 44% 7%
Thailand 180 707 12 7% 2%
Malaysia 111 460 N/A N/A N/A
Indonesia 162 440 28 17% 6%
Colombia 77 137 3 4% 2%
Chile 39 191 8 30% 4%
Source: Various, Indo Premier

Page 6 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

Fig. 19: JCI yoy performance vs. US$/IDR yoy

40% 15%

30% 10%

5%
20%
0%
10%
-5%
0%
-10%
-10%
-15%
-20%
-20%
-30% -25%

-40% -30%

JCI Index yoy% US$/IDR yoy% (RHS)

Source: Bank Indonesia, Bloomberg, OJK, Indo Premier

Note: negative US$/IDR yoy = rupiah depreciation (vice versa)

Fig. 20: JCI’s forward P/E – now trading at c.17x P/E vs. 10-year Fig. 21: JCI’s forward P/BV – now trading at c.1.5x P/BV vs. 10-year
average of 16x P/E average of 2.3x P/BV
25.0 3.5
23.0
21.0 3.0
19.0
18.1 2.6
17.0 2.5
15.8 2.3
15.0
13.0 13.4 2.0 2.0
11.0
9.0 1.5
7.0
5.0 1.0
Feb-09

Feb-15
Feb-06

Feb-07

Feb-08

Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20
Aug-06

Aug-16

Aug-09

Aug-16
Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-17

Aug-18

Aug-19

Aug-20

Aug-06

Aug-07

Aug-08

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-17

Aug-18

Aug-19

Aug-20
JCI P/E AVG +1STD -1STD JCI P/BV AVG +1STD -1STD

Source: Bloomberg, Indo Premier Source: Bloomberg, Indo Premier

Fig. 22: Net foreign flow (monthly) Fig. 23: Foreign fund weight
1,000 34 9.8% 9.7%
9.6% 9.6%
0 9.6% 9.5%
9.5%
-1,000
9.4%
-2,000 9.2% 9.2%
-3,000 9.2% 9.0%
9.0% 9.0%
-4,000 9.0%
-5,000
-3,852 -4,056 8.7% 8.8% 8.8%
-4,757 -4,545 8.8%
-6,000 -5,591 8.6%
-7,000
8.4%
-8,000
-9,000 -7,969 8.2%
-8,817
-10,000
31-Jan 29-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 13-Aug

Net foreign flow (Rp bn) JCI foreign fund weight

Source: Bloomberg, Indo Premier Source: Bloomberg, KSEI, Indo Premier

Page 7 of 8
Refer to Important disclosures in the last page of this report
 14 August 2020
Strategy Update

SECTOR RATINGS
OVERWEIGHT : An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a
positive absolute recommendation
NEUTRAL : A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral
absolute recommendation
UNDERWEIGHT : An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a
negative absolute recommendation

COMPANY RATINGS
BUY : Expected total return of 10% or more within a 12-month period
HOLD : Expected total return between -10% and 10% within a 12-month period
SELL : Expected total return of -10% or worse within a 12-month period

ANALYSTS CERTIFICATION
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the
subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in the report.

DISCLAIMERS
This research is based on information obtained from sources believed to be reliable, but we do not make any
representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness.
Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any
recommendations contained in this document do not have any regard to the specific investment objectives, financial
situation and the particular needs of any specific addressee. This document is not and should not be construed as an
offer or a solicitation of an offer to purchase or subscribe or sell any securities. PT Indo Premier Sekuritas or its
affiliates may seek or will seek investment banking or other business relationships with the companies in this report.