Tuesday, 19 January 2016


The coordinating Minister of Economy Darmin stated that increase of FFR by the fed would assure certainty above the prospect of global economy.

Meanwhile the World Bank warned the risk to be faced by developing countries if FFR was increased, i.e. backflow of foreign capital.

Central banks of the world also wished there was certainty of creased FFR. The sooner increased the better and the clearer the situation would be. Market players must have anticipated increase of FFR by the Fed. Moreover the issue of interest adjustment had been a waiting game for almost year.

Even of the Fed increased FFR, it was no guarantee that Indonesia’s economy would be more controlable.

The Minister of Financial Bambang Brodjonegoro agreed that one of the threats faced by national economy by end of 2015 was uncertainty of the Fed’s action.

Minister Bambang remarked further that there was hope global economy would recover in 2016 provided there was certainty about increased FFR by the Fed and the Government of China would not devaluated their Yen.

The good news was that last Friday (18/9) FORC Meeting in Washington DC finally decided to maintain FFR at 0.25%.

As known, that interest level has been maintained by the Fed since 2008 last. Governor of the Fed Janed Yallen said that increase of FFR would be suspended until there was further evaluation of the US economic condition. The Fed’s Committee referred to some indicators, i.e. the condition of laboir market, inflation pressures and domestic and international financial development.

The Fed had lowered projection of FFR increase from 1.25% to 0.62% by end of 2015. To America, the near zero level interest which had been maintained since around 8 year was seen as an effective way to promote US economy.

Beside the fed some central banks of the world were maintaining their benchmark rate at near zero percent like the Central Bank of Europe (ECB) and Bank of Japan (B o J) but they were less fortunate than the Fed who had posted US bettered economy.

BOJ was still troubled by the need to scheme up extra stimulus to prevent growth contraction in this third quarter while ECB would still have to step up their money printing program.

Although US economy was gradually showing improvement, the Fed saw that external pressures from China would still burden US and global economy, which was the reason why the Fed was not in a hurry to increase FFR.

As known, economic slowdown in china had affected economy of the emerging market while commodity prices of the world kept down turning. The situation in America today was in fact inconvenient because the policy to increase or lower benchmark rate was in fact run for two objectives.

Fristly, to tame inflation, Secondly to enhance economic expansion it was the ideal conditional which had failed to persue. In the long run, if the zero level was maintained, the potential of deflation in the USA remained high, just like the way it happened in Japan and Europe today.

Separately the World Bank warned of the risk faced by developing countries in case there was tight policy run by the US Government, i.e. capital outflow. If the tight policy was accompanied by yield of bonds in the long run the way it happened during the “Taper tantrum” of 2013 reduced capital flow the developing countries could be great.

The term “Taper tantrum” had been frequently used to describe how the market reacted to the comment of the Governor of the Fed at that time, Ben Bernanke, that Fed might reduce bond buying which was part of Quantitative Easing.

The survey showed leap of 100 basis points in US long term return the way it happened during “Taper tantrum” might reduce aggregate of capital flow to the emerging market by up to 2.2% of their GDP.

On such ground meeting of the Board of Government of BI rate at 7.5%. Deposit Facility was also held at 5.5% and lending facility at 8%. The decision was in line with effort inflation to around 4% + 1% in 2015 and 2016.

BI also reviewed China’s policy to devaluate Yuan which generated the effect of price downturn. Deflation was also happening in many countries including the USA they imported in vast amount from China.

Now that it was certain the fed would keep interest-rate at zero percent, the market started to look forward to the next step of the Indonesia Government. As known, the chapter 1 Policy Package launched by the Government by the Government was not strong enough to revitalize market.

Both rupiah and IHSG at BEI were still struggling to strengthen. Ironically it happened when Indonesia’s Trade Balance on August 2015 posted surplus supported by good performance in the non oil-gas sector.

Indonesia’s trade Balance posted surplus of USD 0.43 billion, less than the surplus of Trade Balance was on account of import of non oil-gas commodities which was higher that the increase of non oil-gas export.

Import of non oil gas in August 2015 was posted to increase by 30.48% (m t m) jacked up by import of iron and steel, plastics, machineries and electrical equipments. Import increase in those commodities was early signal of growing economy in the future.

On the other hand, increase of non oil-gas export by 11.23% (m t m) constituted of manufacturing products: jewelry, automotives etc, machineries and nature products: coffee, tea, spices, rubber and rubber goods.

Better Trade Balance of oil-gas product was supported by export amid down turning import. Deficit in trade balance in oil gas was posted at USD 0.58 billion, lower than the previous months at USD 0.87 billion. The downturn was due to export of oil-gas was down by 7.67% (m t m) while import of oil-gas was down by 8.12% (m t m). BI saw that surplus of Trade Balance in August 2015 was positive in supporting transaction in current transaction of Q III 2015 which improved.
The Money market

Meanwhile sentiment from The Fed’s action would suppress Rupiah as there was lack of positive sentiment from the internal although Rupiah managed to strengthen for a moment last Thursday (17/9).

Lack of domestic sentiment led market players to do act selling. Announcement of FOMC meeting did not automatically strengthen USD in the shadows of Euro and Pound sterling strengthening. Still the condition was not good enough keep Rupiah stay in the green zone.

During transaction on Thursday (17/9) rupiah managed to strengthen by 12 points become Rp.14.447 against the previous position of Rp.14.459 per USD. Meeting of the Board of Government of BI to maintain BI rate at 7.5 indicated that inflation was still under control.

The situation had positive impact on Rupiah. However the main sentiment was still from the external due to the Fed’s policy.

As told, after the FOMC meeting on September 16 – 17 in Washington DC finally the fed decide to maintain interest at near zero percent.

Somehow most of the decision markets believe FFR would be increase this year in view of US economic recovery.

The fed maintained benchmark rate at near zero percent, as they feared economic slowdown happening in china lately might injure US economy. Janed Yallen and FFR could be increase before year and.

However decision markets were still anxious about spill over of China’s problem of the emerging market. The fed realized about capital outflow from developing countries, pressures on their currencies and anxiety over their future performance if the Fed increased FFR.

After being indecisive for many years since 2008, the percent of increased FFR shook the global market; the World Bank IMF urged the Fed to be careful when tightening grip on credit.

Yellen also stressed that of important pivots for the policy, i.e. the labor market – had strengthened, and the other pivot, inflation was way too low. But such was due to the “temporary” effect such as steep downturn of oil price. FOMC disclosed that expenditure for household and business investment had increase but export “weakened”.

Yellen also stated that the labor market strengthen since to FOMC meeting in July, weakening lessened since early this year. The Fed saw all that, and US economy performance showed impressive performance whereby to create employment opportunities thanks to high domestic demand.

Somehow the fed had anxiety about the negative impact of global financial condition. One FOMC official said that FFR would be increased this year’s end.

O 17 the Fed’s officials at the meeting, 13 signaled they were expecting increase of FFR this year end, most of them predicted around 0.25% to 0.50%. The decision to maintained FFR was not surprising to many analysts.

In fact the position of USD was in weekly weakening last week against some currencies of the world like Euro and Yen. USD position was at USD 1.1414 per Euro which was an upturn of 0.2% against closing session when USD weakened by 1.3%. Meaning over the week USD already weakened by 0.7% against Euro.

Against Yen, USD was at Ұ 120.13 against the previous position of Ұ120.01 USD was posted to weaken by 0.4% over the week. Weakening of USD was also apparent in Bloomberg Spot Index which at that time was at 1.196.15. Previously the position of USD Index was at 1.193.93, the lowest since August 24 and down by 0.7% last week.

USD never managed to rise ever since the Fed maintained benchmark rate near zero percent. The Fed’s action and wild movement at the stock market was beyond the time market expectation. So USD would be weak for the time being. It seemed reasonable that Rupiah was predicted to improve (18/9) as BI maintained BI Rate at 7.5%.

Rupiah was at the level of Rp.14.327 per USD gaining strength against the position the position at previous closing session at Rp.14.446 per USD. During closing session on Thursday (17/9) rupiah value against USD was seen to be stationary since previous state (17/9).

Rupiah touched lowest level since 1998. Tug of War of sentiments made Rupiah stagnate. Positive sentiment came from domestic stock market. IHSG strengthen quite significantly at 4.378.39 points. Strengthen of domestic stock market was related to BI’s policy to maintain benchmark rate.

At that time market players were waiting for the fed’s announcement of their policy.  Last week (18/9) rupiah was at support level of Rp.14.350 and resistant level at Rp.14.000 per USD, Over the week, Rupiah was projected to strengthen at Rp.14.150 – Rp.14.300. – per USD in the post the fed and BI decision.

Some economic saw that in fact BI had the chance to lower benchmark rate because of bank’ credit slowing down due to economic slowdown Somehow BI choosed to maintan BI rate while anticipating the Fed’s decision who planned to increase FFR this September. It was this dilemmatic condition that caused it to be too risky for BI if they changed the present benchmark rate.

The same was with the condition of rupiah today; it was more governed by global sentiments such as increase of FFR and devaluation of Yuan. On the domestic side was no positive sentiment either was already launched by President Joko widodo - it indicated market’s doubt of The Government’s ability to execute the Policy.(E)

Business New - September 23, 2015

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