The Jakarta stock market closed down over 4 per cent on Monday, taking its 3-day losing streak to 8 per cent.

Indonesia: sinking in the flood

January 10, 2011 10:10 am by Josh Noble

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The sounds of a bubble bursting? The Jakarta stock market closed down over 4 per cent on Monday, taking its 3-day losing streak to 8 per cent. Inflation looks to be the trigger, and the focus is now firmly on Bank Indonesia to act.
But what can Indonesia do to balance rising costs with the fears of higher capital inflows? The rupiah looks like the obvious target.
The FT’s Anthony Deutsch reports from Jakarta:

“For a long time people have been very bullish on Indonesia. There’s been a huge run up since 2009”, said Johanna Chua, managing director and chief economist for Asia pacific at Citigroup in Hong Kong. “Some people are saying Jakarta’s been over bought and I think the real trigger is inflation fears and concerns the central bank is falling behind the curve on inflation.”

Like in China and India, food inflation seems to be the big worry, especially as Indonesia is one of the biggest importers of Australian grains. As research house Gavekal points out:

With an area the size of France and Germany combined currently under water, one might think that the devastating floods wreaking havoc on Queensland would be generating a little more press than they have thus far…
The potential for a pick-up in inflation across Asia was always going to be a concern… Asian inflation is a double whammy in that a) higher input prices put pressure on margins, and b) accelerating prices force policymakers to step on the breaks and squeeze out any excess liquidity. In that regards, the potential for higher energy and food prices triggered by the Australian devastation has to be a concern for Asian equity investors.

The mantra among most emerging markets strategists – whether bullish or bearish on the equity market – seems to be that Indonesia remains a great ‘long-term structural story’. The action in the CDS market suggests that view hasn’t changed – the spread hasn’t budged from its near-record lows.
Bank Indonesia has so far appeared loath to move rates for fear of attracting more ‘hot money. Perhaps as a result, investors are also getting tetchy about rupiah-denominated assets. The rupiah has only risen 1.6 per cent in the past 12 months – less than the renminbi – and significantly less than the major rises seen in the Thai baht and the Malaysian ringgit over the same period.
With rates going up almost everywhere else in the region, Indonesia, for once, looks like the laggard.

http://blogs.ft.com/beyond-brics/2011/01/10/indonesia-sinking-in-the-flood/