As of Monday, foreign investors had bought a total of Rp 118.9 trillion (US$8.48 billion) of government bonds since the beginning of the year. The number was equal to about 46 percent of all government bond sales during the period.

Mandiri Sekuritas fixed-income analyst Handy Yunianto said on Monday that the foreign investors’ rising appetite in the Indonesian bond market was not necessarily caused by tightening liquidity, but rather by slowing global growth.

He explained that last year the United States Federal Reserve’s (Fed) decision to hike its interest rate by 100 basis points (bps) throughout the year caused foreign investors to flee out of the countries with wide current account deficits (CAD) as if their currencies were weakening against the dollar. However, the issue this year was different.

The trade war between the US and China was causing global growth to slow down, he said. “As a result, investors went on to look for countries with better growth and we [Indonesia] are one of them,” said Handy during a press briefing in Jakarta.

Despite recording slower economic growth of 5.05 percent in the second quarter of this year, he said the number was still higher than other countries because the country was primarily driven by its domestic economy. Its involvement in the global supply chain was also low, making Indonesia fairly resistant to the impacts of the trade war.

However, Bank Mandiri chief economist Andry Asmoro warned that the possible slowdown that loomed over the US’ and China’s economies could also hamper Indonesia’s growth, given that the two countries were the archipelago’s biggest trading partners.

“If China’s growth fell by 1 percent, it could make our economic growth fall to 0.1 percent,” he explained. “Meanwhile, if the US’ economy slowed by 1 percent, the impact on Indonesia’s growth would only be about 0.07 percent to 0.08 percent.”

Although the threat of a slowdown was also looming over Indonesia, Andry said he was confident the country could still attract foreign portfolio holders to invest as the global interest rate cycle was showing signs of turning.

He said that central banks in countries like India, Australia and also Indonesia had cut their interest rates as the Fed seemingly took a more dovish stance than last year, which was then followed by cutting its rate by 25 bps at the end of July. The market also expected the US’ central bank to continue cutting its rate until the end of this year.

Aside from showing signs of easing, he continued, some European countries like France, Sweden, Belgium and Denmark were offering negative bond yields.

Andry also said Indonesia’s inflation rate was predicted to stabilize at 3.41 percent at the end of this year. Such a stable inflation rate would open bigger possibilities for Bank Indonesia to further cut its rate by another 25 bps by the end of this year.

“These conditions are making Indonesia present a huge opportunity for portfolio investors,” he said.

Handy expected the rupiah exchange rate to stabilize at between 14,200 and 14,300 per US dollar this year, while rating agencies like Standard and Poor’s would likely upgrade the country’s rating from BBB in 2020.

Moreover, the government’s front-loading strategy was making government bonds scarce and caused their prices in the secondary markets to increase.

Although the influx of foreign money might be good news for the country’s short term economy, Andry said the government should also focus on luring more foreign direct investment (FDI) to Indonesia by establishing better coordination between the central government and regional administrations.

“FDI is key to make Indonesia’s economy more stable in the long run,” he said.

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