The declining nominal growth has been reflected in government bonds outperforming equites for the past six years which is why equity mutual funds have all but halved in the past six years and why GREED & fear hears that major local mutual fund players are exiting the market. Meanwhile, the Bloomberg Indonesia local government bonds index has outperformed the Jakarta Composite by 38% on a total-return basis since the end of January 2019 (see Exhibit 22). Assets in equity mutual funds have declined by 54% from Rp165tn at the end of 2018 to Rp75tn at the end of January 2025 (see Exhibit 23). In another indication of the lacklustre return from stocks, the return from time deposits has exceeded the performance of the Jakarta Composite in the past ten years. The JCI has risen by an annualised 4.9% on a total-return basis since the end of 2014, while the 12-month time deposit rate has averaged a compounded annual rate of 6.4% over the same period (see Exhibit 24).
Meanwhile at the mass market level GREED & fear continues to hear that the popularity of illegal online gambling sites has eaten into mass purchasing power, as also previously discussed here (see GREED & fear - Monetary mechanics and Indonesia, 29 August 2024). GREED & fear heard then that online gambling on smartphones has gone viral in recent years, with estimates of the money potentially lost in this area running at Rp300tn or an extraordinary 2-3% of total bank deposits.
The bank regulator and the government are now starting to focus on this issue. Communication and Digital Affairs Minister Meutya Hafid announced last week after a meeting with President Prabowo that the government will soon issue fresh regulations on the handling of online gambling. So far, the Government has blocked almost one million online gambling sites. The same ministry also reported earlier that online gambling transactions declined from a peak of Rp21tn in 1Q24 to only Rp4tn in 3Q24.
On a related point, Statistics Indonesia (BPS) data shows that the country’s middle class has been shrinking over the past five years. Thus, the middle-class population has declined from 57.33m or 21.45% of the total population in 2019 to 47.85m or 17.13% of the total in 2024 (see Exhibit 25). BPS defines the middle class as those with monthly spending at 3.5-17x the national poverty line, equivalent to Rp2.0m-9.9m (US$130-625) in 2024.
All this shows the challenge facing new President Prabowo Subianto to meet his 8% real GDP growth target by the end of his first five-year term. Remember that real GDP growth averaged only 4.2% YoY in Jokowi’s ten years in office, 5.1% excluding the Covid period of 2020-2021. Meanwhile Prabowo’s cause will not be helped by the fact that real interest rates remain very high after Bank Indonesia’s decision to hold the policy BI rate steady at 5.75% last week following the surprise 25bp rate cut in January. The real BI-rate, deflated by headline CPI, has risen from 2.95% in March 2024 to 4.99% (see Exhibit 26).
That rate cut had caused some investors to hope for more aggressive easing. But it should be noted that the Indonesian central bank has a formal currency stability mandate. Bank Indonesia said in its statement last week that the decision to hold was consistent with efforts to “stabilise the rupiah exchange rate”. While Governor Perry Warjiyo said at the post-meeting press conference that BI has intervened “almost every day” in the foreign currency market to stabilise the rupiah, which has declined by 8.2% since late September 2024 (see Exhibit 27).
To help enforce that mandate BI has been sucking up liquidity by continuing to sell Bank Indonesia Rupiah Securities (SRBI), an instrument introduced by the central bank in 2023 with a maximum maturity of one year. A total of Rp113tn of these instruments have been sold so far this year after selling Rp1,108tn in 2024 (see Exhibit 28). The one-year SRBI yield peaked at 7.54% in May 2024 and is now 6.40% (see Exhibit 29). Foreigners owned Rp225tn or 25.2% of outstanding SRBIs totaling Rp893tn as of 17 February (see Exhibit 30).
All this is why the Indonesian stock market has continued to de-rate as lacklustre earnings growth has led to a decline in both multiples and RoE. The Jakarta Composite now trades at 10.8x one-year forward earnings, down from 19.5x in December 2020 (see Exhibit 31). While the MSCI Indonesia ROE has declined from 25% in 2011 to 18% in 2024 and a projected 17% in 2025, with an estimated earnings decline of 0.6% in 2024 and a forecast 3% growth in 2025, according to Jefferies’ quantitative strategy team (see Exhibit 32).
