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Indonesian assets are under pressure on Monday (13/08). By 16:00 pm local Jakarta time, the Indonesian rupiah had depreciated 0.90 percent to IDR 14,608 per US dollar, while the benchmark Jakarta Composite Index had plunged 3.55 percent. Although all emerging markets in Asia are under pressure on Monday, Indonesia is seemingly the most fragile one.
The central bank of Indonesia (Bank Indonesia) believes that the Indonesian government needs to make a more careful selection in terms of infrastructure development projects in order to curtail the big amount of imports that put pressure on the country's current account balance and rupiah exchange rate.
The Indonesian rupiah had been fairly stable against the US dollar since Bank Indonesia's aggressive 0.50 percent rate hike in late-June (a move that caught many by surprise). However, after the central bank of Indonesia decided to leave its benchmark interest rate unchanged at the July policy meeting (which was concluded on Thursday, 19/07), the rupiah has become under heavy pressure again.
The current account deficit of Indonesia could widen to 2.5 percent - or more - of the nation's gross domestic product (GDP) in the second quarter of 2018 according to Bank Indonesia's Senior Deputy Governor Mirza Adityaswara. He added that a current account deficit below 3 percent of GDP is still in the safe zone. Dividend payouts are expected to put additional pressure on the Q2-2018 current account deficit of Indonesia.
In theory the weak rupiah makes Indonesian export products more competitive on the global market. However, when the content of those export products contain a high degree of imported raw materials, then the positive effect of a weak rupiah is disabled. And the situation is similarly complicated for those companies that import a high degree of raw materials to make products that are sold on the domestic market. They could of course simply raise retail prices. However, the consequence is that demand for the products could drop.
The central bank of Indonesia (Bank Indonesia) announced that the nation's foreign exchange reserves had fallen to USD $119.8 billion (per end June 2018), thus declining USD $3.1 billion compared to the position in the preceding month. As such, the recent trend continued: Indonesia's foreign exchange assets have now fallen for five straight months after touching a record high of nearly USD $132.0 billion in January 2018 (see table below).
Risk perceptions on Indonesian debt have risen amid concerns over the fragile rupiah. So far in 2018 the Indonesian rupiah has depreciated around 6 percent against the US dollar due to US monetary tightening and simmering concerns over the outbreak of a global trade war. Waning risk perception is reflected by the rising credit default swap (CDS) of the five-year Indonesian bond.
The central bank of Indonesia (Bank Indonesia) hiked its benchmark interest rate three times over the past six weeks - by a total of 1.00 percent to take the benchmark to the level of 5.25 percent - in order to defend the rupiah. Last Friday (27/06) Bank Indonesia surprised part of the market by implementing a 0.50 percent rate hike. As a result, the rupiah strengthened markedly. However, its impact on the rupiah performance seems very temporary. This week the rupiah is again depreciating, hovering around the IDR 14,400 per US dollar level.
As we had predicted this morning, Bank Indonesia decided to raise its benchmark interest rate by 50 basis points (bps) to 5.25 percent at the two-day June policy meeting that was concluded earlier today. Presumably markets had been expecting a 25 bps rate hike (therefore being priced in already) and therefore the central bank of Indonesia possibly felt it had to take a more aggressive approach to defend the Indonesian rupiah that had weakened beyond the IDR 14,400 per US dollar level.
The Indonesian rupiah continues to slide on Friday (29/06) and is now hovering around the IDR 14,400 per US dollar level. The weak rupiah reaffirms analysts' expectations of seeing another interest rate hike. Today, the central bank of Indonesia (Bank Indonesia) will conclude its June policy meeting. But perhaps the crucial question is not "will Bank Indonesia raise its benchmark rate?" Possibly the more crucial questions are "by how much will it raise its rate?" and "what other policies will it implement to strengthen rupiah stability as well as financial stability?"
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After a promising start of the day, the rupiah exchange rate and Indonesian stocks lost all of their earlier gains ahead of closing on Monday day (19/05). Around 10:00 local Jakarta time, the rupiah rate appreciated more than 0.60 percent to IDR 11,346 per US dollar on speculation that Jusuf Kalla would be nominated as Joko "Jokowi" Widodo's running mate in the presidential election (9 July 2014), backed by a coalition consisting of the PDI-P, NasDem, PKB and Hanura. After the official declaration, however, the currency lost all of its earlier gains.
The week ended well for both the Indonesian rupiah exchange rate and the benchmark Jakarta Composite Index (IHSG). Based on the Bloomberg Dollar Index, the rupiah appreciated 0.30 percent to IDR 11,413 per US dollar at the end of Friday's trading day (16/05). Meanwhile, the IHSG surged 0.80 percent to finish just above the psychological level of 5,000 points. The good performance was supported by investors' positive response towards the latest political developments in Indonesia.
The government of Indonesia will submit a new draft proposal for the 2014 Revised State Budget (APBN-P 2014) on 20 May 2014. Of the seven basic macroeconomic assumptions in the 2014 State Budget (APBN 2014), three assumptions are proposed to be revised. These involve general economic growth, the Indonesian rupiah exchange rate, and crude oil lifting. The government felt that the assumptions need a revision as results in the first quarter of 2014 have not been up to expectation.
The benchmark stock index of Indonesia - known as the Jakarta Composite Index or IHSG - rose 0.17 percent to 4,921.39 points on Tuesday (13/05), impacted by investors' reaction to positive earnings reports of Indonesian coal miners in the first quarter of 2014. Today, foreign investors recorded net buying of IDR 64 billion (USD $5.6 million) and accounted for 31 percent of trading activity. However, investors remain cautious ahead of the presidential election that is scheduled for 9 July 2014 and wait for more clarity about the (vice) presidential candidates that will compete.
ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the April 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:
While most emerging Asian currencies fell, the Indonesian rupiah exchange rate appreciated 0.08 percent to IDR 11,523 per US dollar based on the Bloomberg Dollar Index on Monday (12/05). The depreciating Chinese yuan, after its central bank set the midrate at its lowest level in eight months, put pressure on other Asian currencies. Today, Indonesia's Finance Ministry sold IDR 10 trillion rupiah (USD $867 million) of bonds, higher than the indicative target of IDR 8 trillion rupiah. Meanwhile, Indonesia’s two-year bonds gained.
The central bank of Indonesia (Bank Indonesia) decided at today’s Bank Indonesia Board of Governors’ Meeting, convened on 8 May 2014, to maintain the country's benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent respectively. This policy is consistent with efforts to steer the rate of inflation towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.
Completely opposite to our expectations, the benchmark stock index of Indonesia (known as the Jakarta Composite Index or IHSG) managed to climb 0.57 percent to 4,862.02 points on Wednesday (07/05). The gain was unexpected as there were no clear factors that could provide positive market sentiments. Moreover, today's Asian stock indices were mostly down. Coincidence or not, tomorrow Bank Indonesia will announce whether its benchmark interest rate (BI rate) - currently set at 7.50 percent - will be changed or maintained.
Indonesian Finance Minister Chatib Basri said that the country's economic growth in 2015 is targeted in the range of 5.5 to 6.3 percent. Amid further Federal Reserve tapering and possible interest rate hikes in the world's largest economy, chances of capital outflows from emerging markets (including Indonesia) are becoming larger. Basri said that these global conditions impact on GDP growth, the Indonesian rupiah exchange rate and inflation. Therefore, 2015 is a transition year, reflected by tighter economic projections and state spending.
At the end of Friday’s trading day (02/05), the Indonesian rupiah exchange rate appreciated 0.32 percent to IDR 11,525 per US dollar based on the Bloomberg Dollar Index. The rupiah performed better than most of its regional emerging peers as inflation and trade data, which were released today by Statistics Indonesia, provided positive market sentiments. Indonesian inflation eased to 7.25 percent (year-on-year) in April 2014, from 7.32 percent a month earlier. Meanwhile, the country posted a trade surplus of USD $673 million in March 2014.
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