Currency & Equity Markets Indonesia Under Pressure, Rate Hike Likely
The Indonesian rupiah and benchmark Jakarta Composite Index are again under pressure on Tuesday (15/05) as the 10-year US treasury yield is again touching 3 percent, while tensions in the Middle East increase and uncertainty about US-China trade relations persist ahead of a meeting between US and Chinese officials in Washington later this week where trade talks resume. Meanwhile, crude oil prices recovered to around USD $71 per barrel, approaching a 3.5 years high, on the back of reduced supply as OPEC reported that the global oil glut has been virtually eliminated.
Stocks on Wall Street experienced a muted close overnight after weakness in defensive stocks offset optimism following US President Donald Trump's conciliatory remarks toward China's ZTE Corp, the second-largest maker of telecommunications equipment in China. Trump pledged to help the Chinese company "to get back into business, fast." This message helped to calm US-China trade tensions. In April 2018 the US Commerce Department had banned local companies from selling to ZTE for seven years after finding evidence that the Chinese company had shipped US goods to Iran and North Korea, illegally.
On Tuesday (15/05) most Asian stocks are in red territory. Indonesia's benchmark Jakarta Composite Index is leading losses being down 1.25 percent to 5,873.01 points by 10:45 am local Jakarta time, while the Indonesian rupiah had depreciated 0.35 percent to IDR 14,022 per US dollar by the same time (Bloomberg Dollar Index).
Later this week Indonesia is bound to see a higher benchmark interest rate. Indonesia's central bank (Bank Indonesia) is set to hold its next monthly policy on 16-17 May 2018. There have been growing signs that Bank Indonesia will raise its benchmark rate (the 7-Day Reverse Repo Rate) at this meeting from the present level of 4.25 percent in an effort to support the Indonesian rupiah rate that has recently been weakening above - or around - the IDR 14,000 per US dollar level.
On 11 May 2018 the following statement was released on Bank Indonesia's website: "Rupiah depreciation over the past few weeks is no longer consonant with current economic fundamentals in Indonesia. Therefore, and considering the large potential of global challenges that could disrupt national economic growth balance in Indonesia in the medium-long term, Bank Indonesia will explicitly and consistently orient and prioritize monetary policy towards creating stability. To that end, Bank Indonesia currently has adequate space to adjust the BI 7-Day (Reverse) Repo Rate. The policy response will be executed consistently and pre-emptively to ensure sustained stability."
Key issues that are putting pressure on the rupiah for the past month are expectations of further monetary tightening in the USA, rising crude oil prices, as well as a build-up of geopolitical risks linked to the escalating tension in the US-China trade war and the US withdrawal of the Iran nuclear deal. Meanwhile, US dollar demand in Indonesia tends to rise in the April-May period due to dividend payouts and foreign debt settlements.
Particularly, the rise in US bond yields is a major problem for Indonesia as foreign investors control about 40 percent of the local bond market in Indonesia. When these foreigners shift to US bonds, Indonesian currency and equity markets are affected significantly.
Update - 14:00 pm local Jakarta time (15/05)
Sentiments deteriorated on Tuesday afternoon after Statistics Indonesia (BPS) announced that the country's trade deficit reached a four-year high of USD $1.63 billion in April 2018. The deficit was attributed to rapidly rising imports ahead of the Ramadan month and Idul Fitri celebrations. Indonesia's Jakarta Composite Index was down 1.87 percent to 5,836.14 by 14:05 pm local Jakarta time on Tuesday.