GEOPOLITIC UNREST SUPRESS RUPIAH AND IHSG

Economic recovery in Europe, America, the USA, Japan, China and India were not accomplished, bad news spread out that America and their allies were planning to attack Syria. This military aggression would certainly generate negative effect to all the world. The world’s economy could be on the setback and world’s oil price would soar sky high.

To the developing nations including Indonesia, military aggression by America and their allies on Syria means economic misery. Their currencies would be depreciated, the stock market corrected. So this week the money market would set their eyes on that scenario.

In short, America’s aggression plan to Syria was predicted to boost up would also be felt on subsidy budget for oil at home because most of the oil need was still imported.

The money market

Rupiah exchange rate value against USD sank deeper. During the morning session last week [6/9] USD strengthened to its highest level at Rp 11,690. The price of USD at the level was the highest in 3 years. In the opening session, Rupiah weakened to position of Rp 11,665 per USD against the previous position of Rp 11,630 per USD.

Meanwhile the position of Rupiah according to the Jakarta Interbank Spot Dollar Rate was Rp 11,200. BI was striving hard to protect Rupiah depreciation against USD, while also preparing for ex swap auction. Last Thursday [5/9] BI had execised swap with target of USD 300 million with tenure of 1,3 and 6 months.

Unfortunately Rupiah value against USD remained low and broke through Rp 11,500, to be exact Rp 11,503 or slipping down by 0.81% against closing session on Wednesday [4/9] at Rp 11,411 per USD. There were other negative sentiments which hampered Rupiah. The released information of bettered manufacturing data and construction spending in the USA signaled that the tapering off stimulus by the Fed would happen, only to reduce USD supply and jack up the value it self.

To the market players, the condition means bad news for Rupiah. Not just that, the invasion plan to Syria posed as negative sentiment. Rupiah was predicted to move at the level of Rp 11,300-Rp 11,500 per USD last week end [6/9]. As for this week, Rupiah would be in range of Rp 11,400-Rp 11,600 per USD which means pressure was still on.

The recipe for revitalizing Rupiah was to control inflation and to downsize deficit in current transaction which could stabilize Rupiah which was now having a wide gap between the BI version and market version of exchange rate. There was no other choice but to improve economic foundation, particularly deficit in current transaction and inflation.

The big difference was due to limited stock of USD, while speculators act was not ignorable. Beside the above mentioned strategy it was also important to maintain market confidence.

In short, the root of problem was a combination of two factors, i.e. Limited stock of dollars and greedy opportunists. A situation as such was hard to control, so the only way out was to strengthen market’s trust.

Rupiah seemed to be helplessly down along with market’s anxiety that the Government’s policy to handle inflation would widen deficit in trade balance which had broken record last July. Market players were today really observing how the Government handled trade deficit because that was the one factor that burdened Rupiah. The value of Rupiah forward contract would have its impact ob Rupiah value at the spot market as the currency was traded by investors who were active at the domestic market.

Some developing countries of the G-20 club were struggling to survive from the economic turbulence happening today because of the prospective US economic recovery. More ever it was feared that America would reduce their dollar supply in the world. The G-20 member countries who once united to respond to the crisis of 2009 were now under pressure due to US economic recovery.

The leaders of nations at the meeting were today focusing attention on unemployment problems and economic growth. Besides tax aversion and tight budget policy was also focus of attention at the meeting. However, economic turbulence would hamper developing nations. With systemic risk, the present condition is crisis prone.

The G-20 Meeting also discussed high political tension in Syria and debates about it arose. They also made sneering remarks about US monetary policy which generated speculations that stimulus would be reduced. Today statement of Ben Bernanke about betterment of US economy had triggered selling spree of currencies at the emerging markets including Indonesia. The condition had made many Asia currencies to drop in value against USD. The Fed’s indecisiveness was rated as disadvantageous to many developing countries.

The month, word was out that the Fed planned to reduce supply of dollar banknotes in the world. This triggered fear among developing countries who were using USD as benchmark in their international transactions.

The Capital Market

Index of IHSG rose by 7 points after sinking quite deeply over the past pew days. IHSG’s low position was benefited by market players to buy cheap shares. During pre-opening session, IHSG strengthened by 7.592 points [0.19%] to the level of 4,058456 while index of LQ rose by 1.931 points [0.29%] to the level of 671.510.

During opening session last week [6/9] IHSG increased by 14.146 points [0.35%] to the level of 4,065.101. Index of LQ45 strengthened by 1.931 points [0.29%] to the level of 671.510. Index was still moving positively although only within narrow range. Domestic investors were buying shares while foreign investors tend to release shares.

By end of session last week [6/9] IHSG should have moved sluggishly at around 4,050-4,100 and strengthening slightly in the range of 4,075-4,150 amidst fear of America attacking Syria and all the consequences.

Last Thursday [5/6] IHSG was axed by 22 points due to selling spree by foreign investors. Selling spree was high as USD strengthened close to its highest level in the past 5 years. Last weekend regional session rose on the average, except Japan’s stock market.

The positive data of China’s economy stimulated act of buying by regional investors. Index of composite Shanghai rose by 11.35 points [0.53%] to the level of 2,133.78. Index of Hang Seng inched up by 22.16 points [0.10%] to the level of 22,620.13. Index of Nikkei 225 dropped by 132.25 points [0.94%] to the level of 13,932.57. Index of Straits Times strengthened by 5.15 points [0.17%] to the level of 3,044.60.

Meanwhile Wall Street stock market regained strength consecutively on the third day due to positive data of US economy, although market players were still haunted by possible US attack to Syria. US President Barrack Obama was suppressed by G-20 countries who were now gathering in Russia not to launch the attack.

Market’s anxiety over Syria heightened as US Congressman John Boehner and partner of the Republic Party Eric Cantor stated they would support attack on Syrian regieme Bashar al-Assad for allegation of using chemical weapon. Leader of the US Senate also planned a Resolution draft to support Barrack Obama’s plan to attack Syria as long as the attack was launched thoroughly for not more than 90 and not to land any US soldier in Syria.

Russia’s President Vladimir Putin again warned America not to make a one-sided action on Suriah without authorization of the UN. Somehow Putin also stated that he did not cast aside chances that Russia would support resolution of the Security Council of the UN to permit a punishment attack to Syria if it was evident that President Assad Regime was using chemical arm.

Last Wednesday [4/9] the US External Relation Committee had conducted voting to approve the plan. Meanwhile Obama’s closest Assistants kept trying to convince US Parliament to tirn on green light to the plan.

Such was the dark side of US invasion plan. Meanwhile the brighter side was growth of the labor sector in the USA which rose quite high in August, the highest in 8 years, while unemployment level fell to the lowest level in 5 years.

Positive economic data might lead to reduction of stimulus program of bond-buying by the Fed in the near future. The issue of stimulus termination by the Fed was getting higher than ever. During closing session on Thursday, index of Dow Jones inched by 6.61 points [0.04%] to the level of 14,937.48. Index of S&P 500 inched up by 2 points [0.12%] to the level of 1,655.08 and index of Composite Nasdaq strengthened by 9.743 points [0.27] to the level of 3,658.785.

In that case, supposedly regional index of Asia was positively affected, but the fact was that IHSG collapsed. Investors were rated as being over reactive were more calm. IHSG’s downturn was now still in safe condition, not crisis prone as in 2008.

The condition of stock market today should be a momentum to increase portofolio investment. As price of share was notably low, that was the opportunity to buy shares as profit was on the store. The only thing was, investors’ option to buy shares could be blocked by the Syria sentiment. Investors were afraid that US invasion might ignite wider conflict in the Middle East, the world’s oil bunker.

The Government of RI also admitted that increased world’s oil price caused by crisis in Syria would increase subsidy burden, However the Government was not going to respond to it by increasing oil price, although the consequences was that the Government must procure subsidy higher than ceiling.

One thing was sure that crisis in Syria would affect some main indicators of Indonesia’s economy, which were: Rupiah value and world’s oil price. As with export to some Middle East countries, supposedly it was not affected as the export destination countries were in the safe zone.

Investors at the local stock market must also observe policy of China’s Government who prohibited import of sub-bituminious [low calorie] coal. As known, the Government of China decided to impose import tax of 3% for the commodity used for power houses. I was not clear whether the policy was also applicable on coal from Indonesia, in the affirmative case it would mean pressure on coal producers who had been troubled by price downturn of global coal.

As footnote, Indonesia was the biggest exporter of low calorie coal to China, constituting 97% of market demand in China. China’s policy would generate negative effect on sales of Indonesian exporters, while causing default on the contracts underway. China’s Board [the cabinet] approved the imposition of import tax; but it was applicable on coal imported from favored nations. Word was out that this new tax regulation would be effective as per August 30. They way it had been, coal was tax free.

Statement of the Government of China did not specifically mention the quality degree of coal, in this case calorie per kilogram which would be tax imposed, although the Government of China classified calorie between 3,800 to 4,200 per kilogram. In regard to the policy, China’s coal traders questioned whether China would impose tax on Indonesian coal.

The point was that China was bound to Trade Agreement with ASEAN countries which obliged zero percent tariff and for all types of coal already terminated since 2008. As known, China was one of the countries who signed free trade agreement with ASEAN, in which Beijing had promised imposition of zero percent tariff for all ASEAN states. 

Indonesian coal miners claimed they were still seeking for clarity of the situation. Beside Australia, China also imported coal from Australia, North Korea, Rusia, and Mongolia. Beijing started to consider to impose import tax after the domestic coal producers association approached the Government on May last to prohibit import of low calorie coal, which was rated as disadvantageous to local miners. China imported 187 million tons of coal in the first 7 month of this year. 

Business News - September 11, 2013