Another Murky Year Could Await Indonesia ETFs

The iShares Indonesia Investable Market Index Fund ETF (iShares MSCI Indons Invstbl Mrkt Indx Fd (NYSE: EIDO)) and the Market Vectors Indonesia Index ETF (NYSE: IDX) are down an average of just 2.75 percent this year compared to a loss of 10.3 percent for the MSCI Emerging Markets. From 2010 through 2015, the Indonesia ETFs outpaced the benchmark emerging markets gauge in four of six years.

Those statistics should not imply investors should be expecting banner showings for Indonesia ETFs in 2016. Stocks in Southeast Asia's largest economy face an array of challenges this year, and those challenges are being highlighted by some major ratings agencies.

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Indonesia Central Bank Cuts Interests

Last week, Indonesia's central bank cut interests there by 25 basis points, but that move is not expected to lead to a rapid increase in lending. A lack of increased lending is important when considering EIDO and IDX because the two Indonesia ETFs feature an average financial services weight of 37.2 percent. The sector is the largest in both ETFs.

“It is not yet clear to what extent the shift in Bank Indonesia's policy stance in favour of growth would come at the expense of stability. Fitch continues to highlight that the authorities' ability to maintain macroeconomic stability is a key factor for Indonesia's sovereign creditworthiness. Monetary policy will be particularly relevant in this regard and Bank Indonesia's cautious stance in most of 2015, in addition to the low public debt burden, has helped Indonesia weather periods of market turbulence,” said Fitch Ratings in a new note.

The Oil Issue

While Indonesia's rupiah has recently been stable relative to other emerging markets currencies, the currency faces another issue: low oil prices. Although Indonesia is not the first country investors think of when they think of major oil producers, something reflected in the scant energy sector exposure found in EIDO and IDX, Indonesia did rejoin the Organization of Petroleum Exporting Countries (OPEC) this year.

Negative Ratings For Indonesian Firms

Standard & Poor's has negative outlooks on eight Indonesian companies, including some found in EIDO and IDX. That is the most negative outlooks on Indonesian firms held by S&P since 2009 and it is possible the ratings agency downgrades more of the country's corporates this year.

“Fitch recently downgraded the Indonesian banking sector's outlook to negative from stable in line with an increasingly challenging operating environment,” said Fitch. “Bank asset quality and profitability should remain under pressure with NPLs rising further to 3.5% by end-2016, with weakness concentrated in the mining sector. Rising ‘special-mention’ loans in 2015 confirm that asset quality pressures have already begun to rise.”

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