JAKARTA -- Investors in Indonesia are girding themselves for an upcoming fuel price hike that is expected to dent consumer demand in the short term as a long-standing economic distortion caused by energy subsidies is corrected.
Shares of major consumer companies like Unilever Indonesia and Indofood CBP Sukses Makmur have already underperformed the benchmark Jakarta Composite Index this month.
President Joko Widodo, who took office on Oct.20, has pledged to cut large fuel subsidies in order to release government budget for other uses.
On Wednesday, newly appointed Finance Minister Bambang Brodjonegoro was reported saying the hike could come before the end of the year.
Investors expect consumer spending to be affected as producers raise prices of products because of higher transport costs. Shares in Matahari Department Store fell 6% on Thursday morning despite the company reporting on Wednesday an 18% rise in net profit for the January-September period of 1 trillion rupiah ($80 million).
"The upcoming quarter may be a challenge," local brokerage Mandiri Sekuritas said in a recent research report. "Despite the [Matahari] management's positive tone, we are taking [a] more conservative stance considering the fuel price hike which leads to lower customer spending."
Many Indonesian companies are already suffering from the weak rupiah which has pushed up the cost of imported raw materials, as well as increased foreign competition in the marketplace in recent years.
Unilever Indonesia, which dominates a number of consumer segments such as soap and instant tea, recently caused a stir with drop in net profits. In July, pharmaceutical giant Kalbe Farma trimmed its outlook for growth of earnings per share for the year from up to 17% to below 13%.
"Stocks in the consumer sector are starting to look expensive, considering the weakness in recent results," said Helmy Kristanto, head of equity research at Danareksa Sekuritas. He expects the situation to worsen short term because of increased costs.
Bharat Joshi, investment manager at Aberdeen Asset Management, expects the negative impact to be short lived. "Profit margins will be squeezed in the short run but the top line will keep growing," he said. "In the long term, the price hike is positive for the economy."