Goldman Sachs: Resilient Amid The Risk-Off, But No Time To Go Long

Goldman Sachs note that "the Rupiah has outperformed peers over the past few weeks despite the risk-off environment and a worsening Covid situation. We think this is partly a function of relatively low foreign positioning in local bond markets, which has dipped to 23% from almost 40% in 2019. Moreover, the central bank has stated that FX stability is a priority and has reiterated that it will use its intervention tools to mitigate market volatility. In-line with this, Bank Indonesia kept policy unchanged in its July meeting despite projecting a lower growth rate of 3.5-4.3% in 2021 (vs. 4.1-5.1% previously). While the combination of low foreign ownership of local bonds and a policy preference for FX stability should allow IDR resilience to continue, IDR outperformance may be more difficult to achieve. In particular, Bank Indonesia's downgrade of its growth forecasts came after the country announced stricter movement restrictions especially in Java and Bali to curb the spread of the Delta variant. On the back of this move, we recently also downgraded our forecast to 3.4% for annual 2021 growth. The government has announced some additional Covid assistance to the population most impacted by the curb, however, and the government will use cash reserves and fund reallocation to finance the new fiscal package. The Finance Minister reiterated that budget deficit target would remain at 5.7% or potentially lower while also announcing that government will cut the issuance of government bonds by around 30-40% in H2 this year. Finally, while lower bond supply (in isolation) is positive for the bond market, the potential for core yields to drift higher over the medium term also contributes to our cautious outlook the IDR."