Investors hail RI spending cuts

Investors hail RI spending cuts

LONDON (Reuter): Foreign investors welcome big spending cuts
by Indonesia but remain wary of the stock market on fears of weak
earnings growth and riots in the east of the country.

"It's good news. But it's too early to talk of a return (to
Indonesian stocks)," Ashok Shah, fund manager at Old Mutual Fund
Managers in London, said Tuesday.

"Until we can see how poorly- or well-managed companies have
been in this pretty atrocious climate it is premature to talk
about a return of real investment."

The government plans to postpone projects worth 39 trillion
rupiah (US$13.22 billion), including a 95-km (60-mile) bridge
linking Sumatra to peninsular Malaysia, until the region's
financial crisis abates.

Officials said the move should slash the budget shortfall and
help keep the current account deficit at three percent of gross
domestic product (GDP) for the next two years, heading off
speculative pressure on the rupiah.

Shah said the decision, which parallels similar cuts in
Malaysia, was logical in the current environment, although
Indonesia's projects had sounder fundamentals than those in
Malaysia.

But until investors saw concrete evidence of high interest
rates coming down, offering relief to hard-pressed corporates,
Shah and other fund managers said they would remain cautious.

"It will help to stabilize the market but I don't think we are
out of the woods," said Peter Robson, fund manager at John
Govett.

"While I don't see the currency weakening much further, it is
going to take real evidence of a turnaround in the current
account before we see interest rates fall from their structurally
high levels. I wouldn't be jumping into the market just yet."

One-year Indonesian interbank rates currently stand around 20
percent with one-month money around 28.50 percent.

Another London-based fund manager said the equity market had
yet to fully digest the impact of the currency turmoil and high
rates which would punish future company earnings severely.

"Both from a top-down and bottom-up point of view the earnings
(forecasts) which are in the market now are significantly too
high," he said.

Analysts added that the positive impact of the spending curbs
had been offset by other negative factors, in particular news of
riots in eastern Indonesia and further market weakness in the
southeast Asian region.

Local markets were battered by the riots, retracing early
gains made in anticipation of the spending cutbacks announcement
to end down 2.9 percent on the day.

Steve Jennions, emerging market analyst at Credit Agricole
Indosuez, took a more upbeat longer-term view, arguing the
measures would help an eventual recovery in the rupiah, and hence
foreign investor sentiment.