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.