Just as investors felt safer and that the world markets were turning the corner, Dubai came up with its debt crisis. The knee-jerk reaction to this has already caused yields on the Sukuk Islamic bonds of the Indonesian government to rise while credit default swap have risen more than 30 basis points.
Investors are concerned that some of these bonds might be owned by Middle Eastern investors, who may choose to sell some of their holdings following the Dubai government's call for a standstill as a first step to restructure its group debts.
Furthermore, fund managers we talked to fear that similar stories to Dubai could emerge in the future, leading to money being taken out of assets such as commodities and stocks. Fortunately, the Indonesian stock market has come up relatively unscathed from this Dubai debacle thus far.
However, for Indonesia, we believe that the impact of the Dubai debt crisis at the macro level may only be fully felt in 2010. For Indonesia, the Dubai debt problem is likely to stall other Middle Eastern investment plans into the country.
Indonesia has been attempting to lure companies from the Middle East to invest and this will force Indonesia to look elsewhere as the Middle East's ability to finance its expansion into the region now comes into question. According to the Investment Coordinating Board (BKPM), in 2009, Indonesia expects Rp 50 trillion (US$5.3 billion, i.e. some 30 percent of the country's total Rp 150 trillion of realized investment) to come from the Middle East.
It is worth noting that the government's target on investment amounted to Rp 1,500 trillion or 10 times the amount of realized investment.
This disappointment stemmed from the global financial crisis. Going forward this will be exacerbated by the Dubai debt crisis in our view.
It is safe to assume that the Investment Coordinating Board (BKPM) would have assumed (i.e. at least prior to the Dubai debt crisis) that the amount of realized investment coming from the Middle East would have risen on a year-on-year basis.
However, with the Middle Eastern countries likely to scale back on further aggressive investments globally, we can also expect less support on expansion into Indonesia.
This clearly jeopardizes Indonesia's plan to secure a targeted total investment of nearly Rp 1,700 trillion next year.
Against a backdrop of continued cross-border risk, possible contagion effects and rising risk aversion, we advise equity market investors to stay defensive and begin trimming exposure towards leveraged stocks such as Indofood with 166 percent net gearing in 2010 (the highest in our coverage).
On the flip side, we recommend investors to accumulate defensive stocks such as Telkom Indonesia, which is in a net cash position and has shown operating improvements.
The writer is the senior vice president and head of research at Bahana Securities
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