By Berni Moestafa
May 29 (Bloomberg) -- Indonesia's benchmark stock index may rebound from the worst year since 2000 after the government cut fuel subsidies to spend more on projects that will boost the economy, the stock exchange's chief said.
The 375-stock Jakarta Composite Index may rise as much as 15 percent this year, Indonesia Stock Exchange President Director Erry Firmansyah said in a May 27 interview. The index, which climbed the past six years, is down 11 percent in 2008. It advanced 0.4 percent to 2,444.3 at 10:25 a.m. local time.
PT Telekomunikasi Indonesia, the nation's largest company by market value, and PT Astra International, the biggest car dealer, dragged the index lower as the government cut its economic growth forecast and inflation accelerated. This month's decision to trim subsidies that made up 14 percent of the budget will free funds for bridges and roads, Firmansyah said.
``Money that previously was for subsidizing fuel can now be spent on infrastructure,'' said Firmansyah, 52, who has been president at the exchange since 2002. ``Infrastructure has a big multiplier effect as it absorbs labor and increases demand for cement and steel. The market needs certainty in the economy to rebound.''
Jakarta Composite companies trade at an average 15.07 times reported profit, making them cheaper than the 15.4 times profit for companies in the MSCI Asia Pacific Index. The Jakarta Composite rose 1.5 percent yesterday to 2,433.769.
Higher Estimate
Firmansyah is more optimistic than some strategists. UBS AG's Jakarta-based analyst Joshua Tanja predicts the index will rise to 2,925 this year, or about a 20 percent increase from today. Firmansyah's forecast would put the index at as high as 3,157.699 at year-end.
The government raised domestic fuel prices by an average 28.7 percent this month. Without an increase, the government would have to spend 190 trillion rupiah ($20 billion) on subsidies, Finance Minister Sri Mulyani Indrawati said May 21.
The government's plans to spur growth include adding 20,000 megawatts of power generating capacity by 2010 to keep up with demand.
``We were concerned that government infrastructure spending would be curtailed,'' said Raymond Gin, director of investment at Jakarta-based PT Manulife Asset Management, which oversees about $1.2 billion. ``Government expenditure will be appropriate and more balanced'' after the fuel-price increases, he said.
Indonesia's benchmark stock index dropped 2.8 percent the first two trading days after the energy price increase took effect May 24 on concern higher fuel prices will spur inflation. The change may push inflation to 11.2 percent by year-end, Sri Mulyani said. That could erode consumer demand, which accounts for about two-thirds of the economy.
Slowing Economic Growth
Inflation quickened to a 19-month high in April, prompting the central bank to raise its key interest rate to 8.25 percent on May 6, the first increase since December 2005. The government lowered its estimate for 2008 economic growth to 6.4 percent in February from its previous estimate of 6.8 percent.
Bandung, West Java-based Telkom fell 22 percent this year on concern consumer spending will decline. Jakarta-based Astra, the country's largest auto retailer, lost 25 percent.
``People are haunted by inflation issues and the policy direction of Bank Indonesia,'' said Patrick Chang, who helps manage $4.5 billion in equities at CIMB-Principal Asset Management Bhd. in Kuala Lumpur.
Firmansyah said higher inflation from fuel prices will ebb after six months, if history is a guide.
Overseas Investors
Inflation jumped to a six-year high of 18.4 percent in November 2005, a month after the government last raised fuel prices. The central bank began cutting interest rates in May 2006 after price rises slowed to 15.4 percent the previous month. The Jakarta Composite gained 16 percent in 2005 and 55 percent the following year.
Firmansyah also cited increased demand for the nation's equities by foreign investors as a reason to forecast a rebound. Overseas fund managers this month bought a net $336.7 million of stock, exchange data through May 27 show, set for the biggest monthly inflow since December.
``The index is now more stable and participation by foreign investors has returned,'' Firmansyah said. ``Hopefully, this will continue to improve.''
To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net.
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