Unimpressive Fundamental Factors to Continue Dragging Down Markets

Lack of positive sentiment has also been detrimental to the markets

Jakarta Globe
Tuesday, August 25, 2015

Economists and financial experts say unimpressive fundamental factors of Indonesia's economy are likely to continue dragging down the country's financial markets, despite authorities having made quick moves to stabilize the rupiah after it dipped, nearly touching 14,000 to the dollar on Friday.

As investors are battered by lingering uncertainties from the global economy, especially uncertainty about rising interest rates in the United States and China’s devaluation of the renminbi, Indonesia's financial markets collapsed on Friday, with the rupiah plunging by 12 percent since the beginning of the year to hit 13,895 against the greenback, according to data from the central bank.

The stock markets also entered bearish territory as the benchmark Jakarta Composite Index lost 2.4 percent to 4,335.95 on Friday, which means the index has slumped 21 percent from its peak at 5523.29 in April.

Head of the research division at local brokerage MNC Securities Edwin Sebayang said the stock decline was mostly triggered from the renminbi devaluation and concerns over China's slowing economy.

However, he said lack of positive sentiment has also been detrimental to the markets, saying the current administration of Joko Widodo and Jusuf Kalla pledged too many promises and sets targets that are too ambitious. Meanwhile, the realization in the field is that government spending and infrastructure projects were slow.

Reza Priyambada, an analyst from foreign-owned brokerage NH Korindo Securities, echoed Edwin's comments.

"Too many promises and less realization, the market became bored, so that it doesn't response much on whatever new policy breakthrough emerges,"  he said, noting that three recent moves by Joko — including his speech at the Indonesia Stock Exchange recently, the cabinet reshuffle and the announcement of the 2016 draft budget — saw a less then positive response from the markets.

Investors await realization, he said, and demanded the government be more realistic in setting up economic targets. Reza also called on the current administration to reduce internal noise.

Reza didn't point to a specific case, but it has been a long concern for investors that the wrong signals from the government to the market, business players and foreign investors have mainly causes the continued deterioration of the economy.

The petty squabble between the coordinating minister for maritime affairs and Kalla is only the latest example of  unnecessary uncertainty for business.

Banking under fire

Meanwhile, relevant authorities are battling the financial downturn. A Bank Indonesia regulation will soon limit the monthly total of US dollars individuals can purchase to $25,000  ̶  unless they have an express reason related to foreign trade.

This already drew a negative response from analysts who argue that it's unlikely to have much effect on the flagging rupiah.

The measure was intended to ward off speculation against the rupiah and to stabilize its exchange value.

BI governor Agus Martowardojo said last Wednesday that the rupiah was undervalued. On Friday, the rupiah closed at 13,941 to the dollar.

“Outside pressures on the rupiah is simply too much,” Eric Sugandi, an economist at Standard Chartered Bank, said on Friday.

“The expectation that the Fed’s key rate will rise and the ongoing currency wars between emerging-market currencies are the main factors depressing the currency.

“Besides, domestic demand for the dollar  ̶  especially from corporations with foreign trade needs and investors  ̶  remains considerable. I predict the US dollar will stay around 13,900 until the end of the year.”

Eric said he was not worried about massive capital outflow brought on by further currency weakening.

“Since the market had time to prepare for the current bout of weakness and the Federal Reserve raising its interest rates, the outlook of rupiah-denominated bonds seems stable,” he said.

M. Doddy Ariefianto, head of economic and financial system surveillance at the Indonesian Deposit Insurance Agency (LPS), agreed with the outline of Eric’s analysis.

“While BI’s restriction can certainly help lessen speculation against the rupiah, the fact remains that the market needs to digest three fundamental points against the currency: uncertainty about rising interest rates in the United States, China’s devaluation of the renminbi, and our own current-account deficit,” Doddy said.

“For projection purposes, the LPS is expecting the rupiah to strengthen to the range of 13,500 to 13,900 to the dollar by the end of the year. Plus, we should have more clarity about what the Fed will do by then.”

This article first appeared on the Jakarta Globe website on August 23, 2015.

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