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Should You Buy Indonesia ETFs on Policy Easing Spree?

Sanghamitra Saha

Indonesia's central bank slashed its interest rate for the fifth time this year on September 22. This was expected as the country intends to jazz up growth amid contained inflation. Moreover, the Fed’s no-hike decision made the case easier for the Indonesian central bank as the Fed’s move, kept the Indonesian currency relatively stable against the greenback (read: EM ETFs Had a Seven-Year Best 1H: Will the Surge Last?).

Inside the Rate Cuts

Bank Indonesia cut its benchmark interest rate by 25 bps to 5%.  As many as 16 out of 19 economists surveyed by Bloomberg had predicted the move. The lending facility rate and overnight deposit facility rate were also reduced by 25 bps each to 4.25% and to 5.75%, respectively.

Factors Facilitating the Rate Cut

Policymakers said the decision was taken in the wake of “macroeconomic stability, low inflation and relatively stable exchange rate.” Core inflation rate in Indonesia grew 3.32% year over year in August 2016.

Notably, this was the record low core inflation rate which hit an all-time high of 8.29% in December 2008. “The central bank forecast inflation -- which reached 2.8 percent in August -- will reach the lower end of the 3—5% target by the end of the year,” as per Bloomberg.

The economy has been expanding below the 7% goal fixed by president Joko Widodo. Notably, Joko Widodo, popularly known as "Jokowi" took office in October 2014 and is viewed as a pro-growth president. He introduced a host of economic reforms. In fact, he has been quite open about his desire to see interest rates falling to spur growth (read: Bremain or Brexit: No Worries for EM ETF Investing).

The finance minister of Indonesia expects 5–5.1% growth in 2016, while Asian Development Bank slashed the 2016 GDP growth forecast for Indonesia to 5.0% from 5.2% projected in March 2016. The bank also reduced its 2017 Indonesian economic growth estimate to 5.1% from 5.5%. A slack in investment spending was behind this reduction (read: Indonesia Growth Sluggish Despite Reforms: ETFs in Focus).

Should You Buy Indonesia ETFs?

Despite cutting the growth forecast, ADB is still hopeful on the prospect of the Indonesian economy. The bank noted that “higher minimum wages, an increase in the tax-free income threshold and decelerating inflation” would boost private consumption and thus economic growth. Reformative measures for the agricultural sector will likely enhance rural incomes, as per ADB.

Among the other factors that should bolster economic growth in Indonesia, higher government spending toward the infrastructure sector in the second half of 2016 deserves a mention (read: 3 Asia EM Equity ETFs Gaining from Surging Inflows).

Against this backdrop, a dovish Fed should do its part of job to favor the Indonesian economy and the related stocks and ETFs. Investors who view medium-term prospects in the Indonesian economy can play three ETFs – iShares MSCI Indonesia ETF EIDO, VanEck Vectors Indonesia Index ETF IDX and VanEck Vectors Indonesia Small-Cap ETF IDXJ. IDXJ, IDX and EIDO added about 1.7%, 1.4% and 0.9%, respectively, in the last five trading days (as of September 26, 2016). All three have a Zacks ETF Rank of 3 or ‘Hold’ rating, with a High risk outlook (see: all Asia-Pacific Emerging ETFs here).

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ISHARS-MS INDON (EIDO): ETF Research Reports
VANECK-INDONES (IDX): ETF Research Reports
VANECK-INDO SC (IDXJ): ETF Research Reports
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