Foreign investors keep IDgov bonds afloat in 2014

11.8bn of fund inflows was recorded last year.

Foreign investors remain net buyers of IDgov bonds so far this month, sustaining the firm interest prevalent in 2014. Except for December, every month in 2014 saw net foreign fund flows into the IDgov bond market. A total of USD 11.8bn worth of fund inflows was recorded for full-year 2014.

According to a report by DBS, currently, one supporting factor for the bond market is the anticipation that CPI inflation may ease more markedly going forward. The government has scrapped its subsidies on gasoline and will instead set prices on monthly basis in line with global crude oil prices. Gasoline price is now about 10.5% lower than in December, following the recent fall in crude oil prices. If crude oil prices fail to rebound from current level, gasoline price may be adjusted even lower in February, pulling headline CPI inflation down with it.

Here’s more from DBS:

The anticipated fall in CPI inflation may not be steep though. General prices tend to be rather sticky. Despite lower gasoline price, anecdotal reports suggest that transport cost and prices of main food items have not been revised lower as yet. These may mean that CPI inflation could very well remain around 7.5-8.0% in the next few months. Still, average CPI inflation in 2015 may be closer to 6%, rather than the 6.5% that we are currently pencilling in.

It will be interesting to hear what Bank Indonesia (BI) have to say next week with regards to its policy trajectory. Softer CPI inflation may provide room for a rate cut but BI is unlikely to rush to reverse the 25bps rate hike delivered in November.