INDONESIA

Although domestic growth remains relatively stronger than most other Asian economies, the IDR could continue to underperform in the coming quarters given the weakness in the current account and fiscal balances. We have revised lower our end-2012 target for USD/IDR to 9,600 from 9,000 while we do not rule out the pair rising as high as 10,000 in 3Q12 as a result of the tail risks in the Eurozone.

    Foreigners’ holdings of the IDR-denominated government bonds has dropped sharply from its peak in July 2011. This would constrain Bank Indonesia in pushing interest rate any lower from here and a pick up in inflation could further reduce the attractiveness of the local assets.

    We expect the risk of a sharp spike in CPI to have eased as global oil prices pulled back amid the risk aversion, keeping off pressure to raise the domestic fuel oil prices. One key concern is the increase in imported inflation as the currency weakened.

    The Indonesian economy has remained resilient in the first quarter as it continued to expand above 6.0% y/y for the sixth consecutive quarter. This could continue in the upcoming quarters despite the global downturn.