RUPIAH AND IHSG INCHING UP TO GREEN ZONE

The tight money policy adopted by BI which was OK’d by the Government was believed to better investors perception. Increase of BI rate and application of LTV for KPR mortgage and automotive credit was believed to put brakes on credit growth.

Furthermore it would reduce production and end up in import slowdown of raw materials and auxiliary materials for industry. On the other hand, it would reduce deficit in current transaction. Accordingly inflation pressures from import would be reduced, while reduced public consumption would ease inflation.

The end result would be betterment of current transaction and inflation could be controlled. Hopefully market players would  react positively if the scenario would run well. It would strengthen Rupiah exchange rate value and enhance stock buyers’ zest.

The Moneymarket

Rupiah exchange rate value against USD at the interbank spot market Jakarta on Friday [27/9] strengthened. Sentiment came from postponement of Tapering off by the Fed till December 2013, which was the potential of Rupiah strengthening.

One if the High Executives of the Fed of Richmond, Jeffrey Lacker signaled that acceleration of US economic growth would not happen in the near future. Therefore it might be concluded that it would be hard for the Fed to do tapering off next October. This was a chance for Rupiah to strengthen to the level of Rp11,400-Rp11,500 per USD.

Furthermore data of US GDP which was released on Thursday [26/9] slumped down way below the estimated 2.7% to become 2.5%. supposedly this data was able to jack up Rupiah performance this weekend. Besides, the market would also be influenced by data of year-on-year inflation in Japan. If this level was low enough against the previously published 0.4% it was still way below the Abenomic policy target.

Most probably there would be more aggressive stimulus of the Bank of Japan to make sure that inflation rate would meet target. With more aggressive stimulus from Japan, supposedly it also had positive there was no new sentiment expect the strategic plan to control deficit current transaction and inflation.

Other positive catalyst was the potential to continue negotiation between Iran’s new President Hasan Rohani with the West to end embargo and nuclear program. The development would be the market’s focus of attention as it would enhance optimism to cool down political tension in the Middle East.

In the affirmative case it would bring down price of oil so it would heal the condition of trade deficit in Indonesia. Other catalyst to watch on was voting by the US Congress in regard to elevation of debt ceiling and US budget resolution to prevent closing of budget by their Government.

For information, Rupiah value against USD last Thursday [26/9] was closed to strengthen by 30 points [0.26%] to the position of Rp11,450. Meanwhile BI set Rupiah mid-rate at Rp11,573 per USD. Strengthening of Rupiah happened when USD value weakened against most of Asia Pacific currencies.

The notably insignificant strengthening of Rupiah was market reaction to suspended tapering off by the Fed. This tapering off of monetary stimulus was said to start next year till September 2014. However, there was negative sentiment at home which could influence rupiah movement, i..e. the Government having the obligation to pay debt due in the near future.

Payment of overseas debt due by the Government would increase demand for USD. Rising demand for USD made Rupiah flop. Besides, demand for USD for payment of debt of the private sector influenced Rupiah movement. In responds to Rupiah fluctuation, BI adopted a policy whereby BI had to increase BI rate by up to 150 basic points to 7.25% as deficit in current transaction and inflation had become serious national economy.

The swelling deficit in current transaction and soaring inflation since mid 2013, finally generated various expectations in the market which finally made Rupiah depreciated. BI was aware that the Government was not the only one who could solve problems. Hence, from June to September 2013, meeting of the Board of Governors of BI decided to increase policy rate to 150 basic points to 7.25%. BI did not only apply this one single monetary instrument but also a policy mix.

At this credit rate level, BI was able to control domestic demand which would eventually maintain stability of Rupiah value against USD. BI rate for controlling inflation and domestic demand, which would finally contract current account deficit.

Increase of BI rate would not automatically drum up foreign and domestic investment if Indonesia’s economic climate was still full of risk. So BI realized there should be coordination with the Government because monetary strategy alone would never crack economic problems today.

Although some of Asian currencies had recovered from last month’s turbulence, Rupiah never seem to rise and remained to slump. Deficit in current transaction and inflation were not supportive to Rupiah strengthening. There was a little increase in trust, but no outcome of increased liquidity. The market was reacting more positively to Rupiah after BI increased benchmark rate and the Government trying to reduce subsidy for oil.

Ever since there was growing anxiety of stimulus reduction by the Fed, capital kept flowing out of Indonesia. Pressures on rupiah kept increasing as deficit in current transaction kept widening. The market was really anxious about when liquidity would be normalized. Soon there after Rupiah would be more stable. However there was some structural issue to be tackle before better mid term projection could be seen.

However it seemed that policy makers were not too motivated to strengthen Rupiah. With high inflation expectation, the Government and BI needed to let Rupiah being depreciated in the long run to remain competitive. It was noteworthy that if Rupiah slightly strengthened it would be hard to reduce deficit in current transaction.

The opportunity for Rupiah to strengthen also came from BUMN circles. For the time being the Government permitted stated owned companies [BUMN] including Pertamina to do hedging of some foreign currencies considering Rupiah steep downturn recently. This policy was in reverse to the policy of 2008, which forbade BUMN to do such practices because it was rated as disadvantage to the state.

The hedging policy by BUMN was temporary, until Rupiah was back on its feet again. As know, Rupiah was constantly weakening this year – being depreciated by 16% making it the worst performing Asian currency. Rupiah weakening was on account of deficit in current transaction which swelled, particularly on account of high import of oil fuel. This Ministry of Finance estimated Pertamina would need USD 150 million on the average for oil importing.

In the future, including this coming week, Rupiah was still consolidating above Rp11,000 per USD. The only thing was, after the Fed postponed Tapering Off Plan, there was opportunity for Rupiah to strengthen to around Ro11,350.- Ro11,450.- per USD this week. The optimism was strengthened by tender outcome of SUN Promissory Notes which was over-subscribed.

The continued monetary stimulus by the Fed seemed to have its impact on SUN bond auction was over-subscribed more than 3 times at the value of Rp25.78 trillion. Investor’s zest to buy bonds was still high after continued stimulus by the Fed.

The Government absorbed fund of Rp12 trillion of tender, exceeding the indicative target set at Rp8 trillion. The high total demand was also influenced by supply of SUN which was thinning out. Toward end of year the Government only had to absorb fund of Rp65.5 trillion to meet target of State Promissory Notes [SBN] of 2013. Of the total need, by estimate only around Rp40 trillion were to be obtained from regular auction. The rest, around Rp20 trillion was to be obtained from Indonesia Retail Bond [ORI] and Rp5.5 trillion from release of domestic forex SUN.

Rupiah had the potential to strengthen this week by negative sentiment on the performance of the US Government cashbox. International Rating Agency Moody’s Investors Service warned the US Congress and White House that if they could not troubleshoot the cashflow problem, it would not only stop Government activities but would trigger unrest in the world’s moneymarket.

According to Moody’s last Wednesday [25/9] there was no intention to lower America's debt rating, they were thinking more about the impact on the global market. Moody’s statement referred to America’s cash box in mid-October 2013. The US Minister of finance Jack Lew had sent a letter to US Congress in which he stated: To carry on with state administration and pay all obligations, the US Government needed new debt; which was because state’s income from tax was not sufficient. Therefore, mandate of the US Congress was necessary to approve borrowing to support Government expenditure.

Year after year America kept increasing their debt, especially since the days of Ronal Reagan who was anti tax. President Barrack Obama intended to reverse the process by increasing income from tax. However the proposition was constantly objected by the US Congress which was dominated by the Republicans. According the Lew, the present debt ceiling which was presently USD 16.7 trillion was no longer adequate. If debt was not increased, America’s cash would remain only USD 50 billion left by mid October, which was only sufficient for financing administration for three short days.

Chairman of US Parliament John Boehner [Republican] stated that the US Congress was ready to approve elevation of debt ceiling. President Obama stated that America needed additional expenditure of USD 700 billion through 2013inclusive of health program the low class people. However, increased debt must be compensated with downpressing of expenditure especially in health programs, Obama was not willing to do so because it was his promise during Presidential campaign to his supporters.

The Capital Market

Index of IHSG rose by 30 points thanks to investors chasing cheap shares. Although lack of positive sentiment, acts of buying continued to happen. During per-opening session last week end [27/9], IHSG strengthened by 30.871 points [0.70%] to the level of 4,436,764 while index of LQ rose by 7.873 points [1.07%] to the level of 743.376.

To open transaction [27/9] IHSG soared up by 4.449 points [0.94%] to the level of 4,447.342. Index of LQ45 rose by 9.352 points [1.27%] to the level of 744.855. Cheap shares were hunted by investors. Nearly all secroral indices at the stock hall managed to strengthen.

Previously IHSG was negative for 5 consecutive days. IHSG once strengthened, but heightened act of profit taking forced index to fall into the red zone. And yet last Thursday [26/9] . Wallstreet managed to strengthen after being corrected for 5 consecutive days. Positive growth was in new employment data, but the problem of limited cash limited strengthening process this time.

Unemployment level in America dropped to its lowest level in the past 6 years in the report of US Labor Department. Other data which were positive were housing and price of consumer goods. If the data was good, the unemployment data to be reported next month could also be positive.

During closing session last Thursday [26/9], index of Dow Jones increased by 55.04 points [0.36%] to the level of 15,328.30. Index of Standard & Poor’s 500 strengthened by 5.90 points [0.35%] to the level of 1,698.67. Index of Composite Nasdaq increased by 26.33 points [0.70%] to the level of 3,787.43.

Investors would have to face weekly unemployment data. Economists unemployment claim increased to become 327 thousand against the previous week at 309 thousand. In addition to that final revised data of US economic growth would also be released. US economic growth was predicted to grow by 2.7% against the previous estimate of 2.5%. In addition to that data of mortgage sales in August and revised data of employment growth would also be released.

Meanwhile stockmarkets in Asia were moving the mixed way. Mixed sentiment of global stockmarkets forced players of the regional stockmarket be cautious in making transactions. Index of Composite Shanghai dropped by 2.34 points [0.11%] to the level of 2,153.47. Index of Hang Seng increased by 46.06 points [0.20%] to the level of 23,171.09. Index of Nikkei 225 reduced by 26.03 points [0.18%] to the level of 14,772.49. Index of Straits Times increased by 20.03 points [0.63%] to the level of 3,214.34.

As footnote, during transaction last Thursday [26/9] IHSG was closed to inch down by 0.874 points [0.20%] to the level of 4,405.893. Meanwhile index of LQ45 was closed to reduce by 1.533 points [0.21%] to the level of 735.503. Second tier shares rose highest today, in the afternoon being subject to act of selling. Some premium shares could still strengthen, but failed to bring index to positive zone.

Players of the regional market was still waiting for the latest new from the Fed’s stimulus and Stated Budget of the US Government. This made the regional stockmarket to end up the mixed way.

Positive sentiment of the stockmarket this week and the following came from the report of eminent performance by the end of September 2013. In spite of mounting pressures due to weakening economic performance, it was believed not to downpress company’s performance significantly. So to anticipate all possibilities, all sectoral shares expect mining and construction, would be investors’ target in the next three to four weeks.

Business News - October 2, 2013