Indonesia's soaring stock market has been the best performing bourse in Asia this year as a business-friendly president lures foreign investors sniffing out bargains, analysts say.
Despite last year's massive fuel price hikes leading to higher interest rates and a dramatic spike in inflation, analysts say they expect stocks in Southeast Asia's largest economy to continue their rally.
Since the start of the year, the Jakarta Stock Exchange composite index has jumped 16.35 percent, gaining 191.589 points to close at 1363.298 last Friday, a record high.
Analysts attribute much of the gain to President Susilo Bambang Yudhoyono, who came to power in October 2004 pledging to clean up Indonesia's notorious corruption, seen as one of the archipelago nation's main impediments to growth.
"Fundamentally, it's political reasons. Secondly, it's economics," economics professor Didik Rachbini from Mercu Buana University said of the recent bull run.
He said the rise has been fueled by investors abroad returning en masse after their 1997 exodus, when Indonesia's rupiah plunged and the country's frail banking and economic system -- greatly undermined by years of corruption, collusion and nepotism -- collapsed.
"Indonesia has been industrializing for at least three decades, the crisis is almost finished, democracy is being maintained by everyone," Rachbini said.
Political uncertainty in Thailand and the unstable situation in the Philippines since February, when Philippine President Gloria Arroyo declared a state of emergency after an alleged coup attempt, also saw Indonesia's star rise.
"The situation in Manila and Bangkok [has been] a good opportunity for Indonesia," Rachbini said.
The optimism is an about-face from last year, when a mini-
currency crisis in August saw the rupiah plunge more than 20 percent as global oil prices hit historic highs, battering the government on two fronts.
It had to scurry to find dollars to pay for more expensive oil imports but also to provide huge domestic fuel subsidies.
Though he was initially criticized for being slow to act, Yudhoyono took the politically risky move of hiking domestic fuel prices by an average of 126 percent last October -- after a hike of 29 percent the previous March -- winning praise from market analysts as well as the IMF.
great hopes
Yudhoyono also sacked an underperforming finance minister and has talked up plans to make investment more attractive to foreigners by abolishing red tape and streamlining investment procedures.
"On the political front, on the macro front, investors have great hopes for this year," said Song Seng Wun from CIMB-GK Securities in Singapore. "This president is much more politically savvy, is a great marketer and knows how to show his face, anticipating what investors want."
The fuel price hikes led to interest rates being jacked up more than 5 percent last year, triggering an inflation spike of 17.11 percent for the year and fears of a growth slowdown.
But the rupiah has strengthened in past weeks, inflation is now seen as likely to fall and interest rates are tipped to ease.
Fauzi Ichsan, an economist with Standard Chartered Bank, said it is the stronger rupiah and optimism on rates that have piqued investor interest.
"The rupiah has strengthened rapidly, this reduces the debt burden. A stronger rupiah also helps the buying power of Indonesians, and we believe that interest rates have peaked, so this stimulates domestic consumption," he said.
And despite the fiery rally, analysts say Indonesian stocks remain a good buy.
"Valuations are cheap relative to region," said Harry Su, an analyst with BNP Paribas Peregrine.
Nevertheless, Su warned that if company earnings were less than expected, or political unrest was suddenly stoked, the market would suffer quickly.
"There are always risks in Indonesia. It's just easy to sweep all of the bad news under the rug with liquidity flow coming in, but it could come in, then just go out," he cautioned.
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