Bloomberg Indonesia Stocks Slump Most in Two Years on Concern About Rising Inflation

Indonesia’s stocks tumbled, with the benchmark index dropping the most in more than in more than two years, amid concern accelerating inflation will curb returns and prompt higher interest rates.

The Jakarta Composite index, the best performer among Asia’s 15 biggest markets in 2010, fell 4.2 percent to 3,478.55 as of the 4 p.m. local-time close, the most since November 2008 and extending a three-day drop to 8.1 percent. PT Bank Central Asia, Indonesia’s largest lender by market value, sank 7.8 percent. PT Indosat, the nation’s No. 2 telephone company, fell 7 percent. The rupiah plunged to a five-month low.

The central bank may raise its benchmark interest rate by a “cumulative” 100 basis points starting in February to curb inflation, Morgan Stanley said in a note today. December inflation accelerated to 6.96 percent from a year ago, compared with the central bank’s rate of 6.5 percent.

“People expect the real interest rate to stay positive and they’re not seeing this here,” said Fadlul Imansyah, who helps manage $210 million at Jakarta-based PT CIMB Principal Asset Management. If the difference between inflation and the benchmark interest rates “is negative that may prompt investors to leave the market for a while.”

Indonesia’s stock index jumped 46 percent last year as the central bank kept its benchmark rate at a record low for 17 months to boost Southeast Asia’s biggest economy. The index has fallen 6.1 percent this year as inflation accelerates, increasing speculation that borrowing costs will increase.

Palm oil futures have risen 45 percent in 12 months while crude oil has climbed 7.7 percent, adding to food and energy input costs. Indonesia is preparing a national campaign to encourage people to plant chilies, a component in the consumer price index, to help curb inflation, the Jakarta Globe reported Jan. 6, citing Agriculture Minister Suswono.

Wheat, Beans
The government will remove import duties on wheat flour, soya beans, rice and livestock feed starting this week to help stabilize prices, Coordinating Minister for the Economy Hatta Rajasa said on Jan. 7 after data last week showed consumer prices rose at the fastest pace in 20 months in December. The rupiah, which advanced 4.6 percent last year, has lost 1.1 percent so far this year on concern European nations will struggle to raise funds, slowing a global economic recovery.

The rupiah traded at 9,073 per dollar, compared with 9,028 at the end of last week, according to data compiled by Bloomberg. That’s the lowest level since July 23.

Core Inflation
Core inflation, which excludes food and energy, may not exceed 5 percent this year even as costlier commodities threaten to push consumer-price gains above 6 percent, the central bank said Jan. 7. Indonesia ordered banks to set aside more cash as reserves to reduce inflationary pressure in 2010, while refraining from joining Malaysia, Thailand and India in boosting borrowing costs.

“Interest rate normalization should start in February 2011 to buy insurance against what are clearly rising inflation pressures and to prevent rising inflation expectations from becoming too sticky,” Morgan Stanley economists Deyi Tan, Chetan Ahya and Shweta Singh wrote in a note today. “This could be delayed by one to two months if Bank Indonesia waits for core inflation to actually edge closer to 5 percent.”

Bank Central Asia fell 7.8 percent to 5,900 rupiah. PT Bank Mandiri, the nation’s largest bank by assets, declined 6.3 percent to 6,000 rupiah while PT Bank Rakyat Indonesia, the second-biggest by assets, dropped 5.1 percent to 9,300 rupiah. Financial stocks are the biggest decliners among the nine industry groups on the composite index.

Indosat lost 7 percent to 4,975 rupiah. PT Matahari Putra Prima, an Indonesian retailer, slumped 12 percent to 1,470 rupiah after saying it will retain its hypermarket business while inviting “strategic partners” to invest in or buy a majority stake in the company.

To contact the reporter on this story: Berni Moestafa in Jakarta