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Indonesia Banks on Back-to-Back Rate Hikes: ETFs in Focus

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The Indonesian Central bank on Aug 15 hiked its benchmark seven-day reverse repo rate to 5.50% from 5.25%, this being the fourth hike in less than three months. Only seven out of the 28 economists in the Bloomberg survey had forecast it. The move was a surprise for many but not totally unexpected if the current emerging market scenario is kept in mind. 
 
This year, the Indonesian rupiah has been one of the worst Asian currency performers and has fallen about 7% , the lowest against dollar since 2015. There was a modest recovery post announcement (read: Currency ETFs Winners & Losers on Turkey Crisis).
 
Turkey's domestic economy vulnerability and a sharp decline in lira created problems for most of the emerging currencies. The latest rate hike was probably the reaction to that crisis. The Central bank  predicts inflation to remain within the 2018 target range of 3.5%, plus or minus 1 percentage point and it revised its economic growth projection for the year 2018, down to a range of 5.0% to 5.4% from a range of 5.1% to 5.5% (read: Most-Hurt EM ETFs on Turkey Upheaval).
 
Market View on the Economy
 
"With the rupiah likely to remain under downward pressure over the coming months, further rate hikes are likely before the end of the year," Per Gareth Leather, senior Asia economist at Capital Economics, as quoted on Nikkei Asian Review
 
Though Turkey crisis had a spillover effect on the emerging market bloc, several analysts believe that the impact of that crisis on Indonesian economy will be limited. An analyst from Mirae Asset Sekuritas Indonesia sees “a low chance of Turkey risk derailing Indonesia's growth trajectory, given Indonesia's relatively benign fundamentals as well as room for monetary policy response."
 
What’s Behind the Rate Hikes?
 
The country has been persistently running current account deficits. A current account deficit of 3% of the gross domestic product and high proportion of foreign investments in the government bonds make the economy highly susceptible to outflows. The shortfall soared to $8 billion in the second quarter -- the maximum in four years. Indonesia also posted a trade deficit of $2 billion in July -- the highest in five years. Foreign investors have started to overlook Indonesia, with investments falling nearly 13% in the April-June quarter -- the first decline since at least 2010.
 
Since the Fed has been raising rates gradually lately, the Indonesian central bank had to support the rupiah by hiking rates. Per the senior Asia economist at Capital Economics, “Even if the crisis in Turkey starts to fade, we think a combination of rising U.S. Treasury yields and the escalating trade war between the U.S. and China, will keep the rupiah under downward pressure... for now it seems unlikely that today's rate hike will mark the last in the current cycle (read: Dollar ETF (USDU - Free Report) Hits New 52-Week High).”
 
Reforms Brought in
 
President Joko Widodo has been focused to increase foreign reserves that have been drained by almost $14 billion since January as the apex bank had to intervene several times to stabilize the currency market.
 
The finance minister of the country said the government will impose a 7.5% import tariff on 500 consumer goods and raw materials that "have the potential for product substitution within the country." In addition, energy projects at state companies that need a large amount of imports would be postponed.
 
Against this backdrop, let’s take a look at Indonesia ETFs. 
 
iShares MSCI Indonesia ETF EIDO
 
This fund tracks the MSCI Indonesia Investable Market Index, which has a targeted exposure to Indonesian stocks. There are currently 83 holdings in the pool of funds in which Bank Central Asia (13.85%), Bank Rakyat Indonesia (10.38%) and Telekomunikasi Indonesia (10.09%) are the other double-digit weight holders. The fund has an AUM of $385.1 million and an expense ratio of 0.62%. The fund has recorded a loss of 2.07% in the past one month (as of Aug 16, 2018). It has a Zacks ETF Rank of #3 (Hold) and a High risk outlook.
 
VanEck Vectors Indonesia Index ETF IDX
 
This fund tracks the MVIS Indonesia Index comprised of securities of companies that are incorporated in Indonesia or outside but have at least 50% of its revenues/related assets in Indonesia. There are a total of 44 holdings managed by the fund, with the highest weight given to Bank Central Asia (8.45%).The fund has an AUM of $49.6 million and an expense ratio of 0.57%. About 1.44% of losses were accumulated in the past one month (as of Aug 16, 2018). It has a Zacks ETF Rank of #3, with a High risk outlook.
 
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