Indonesia's Low Rates May Lure Investors Away from India, China

Jakarta Globe, February 04, 2010

Early tightening by some Asian central banks has injected uncertainty into investing in the region's emerging markets, but Indonesian bonds will remain attractive as policymakers there will likely hold fire on interest rates until later in the year.

China and India have raised bank reserve requirements quicker than analysts had expected, increasing speculation that their central banks will raise rates to cool down their economies sooner than initially thought.

Those concerns in part caused emerging market debt funds to swing sharply to underperformance in the last few weeks, according to Standard Chartered. They have also rattled stock markets, with China-focused equity funds posting net outflows for 18 of the last 19 weeks.

In Indonesia, new loan growth has not been as robust as in China over the past year, and food prices are not rising at a double-digit pace as seen in India.

Even with consumer inflation in Indonesia rebounding to the highest rate since May 2009, risks are low that interest rates in Southeast Asia's largest economy will rise sooner than those in China or India, and so far expectations of future price pressures remain under wraps.

That will likely continue to be reflected in Indonesia's long-maturity government bonds, which have been outperforming similarly rated debt from the Philippines.

Indonesia's central bank kept its rates steady at a record low at a meeting on Thursday, downplaying a January spike in inflation and maintaining its dovish stance in contrast to some of its Asian peers.

A small majority of analysts do, however, believe it may start raising rates in the second quarter from the present 6.5 percent to rein in price pressures.

China, India, South Korea and Indonesia were big draws for foreign investors last year, which is why a change in fiscal or monetary stance turns heads.

Indonesia will be the third-fastest growing economy in emerging Asia this year behind China and India, according to a Reuters poll.

Reuters