STRATEGY VS THE FED'S MANEUVERS

This week the market’s attention would be focused on the implication of BI’s move exercise SWAP policy by July 18, 2013 last against confirmation by Chairman of the US Central Bank Ben Bernanke on confirmation of the US stimulus program.

               

It was expected that the two issues would generate positive sentiment to Rupiah. The same was with the stockmarket, since market trust would be strengthened. At least the confusion over Bernanke’s statement on May 22 last which shocked the global moneymarket could be gradually eliminated. One thing was sure the process of Rupiah and IHSG strengthening would run nice and slow.               

The Moneymarket

               

Apparently Rupiah exchange rate value against USD at the interbank spot market in Jakarta of Thursday [18/7] was closed to weaken by 15 points [0.14%] to the point of Rp10,055. The condition still continued during transaction on Friday [19/7] at the level of Rp10,165 per USD which means weakening of 1.04% against closing the day before. Weakening was not only happening to Rupiah but also to most of the currencies in the Asia Pacific region. The USD was seen as constantly strengthening lately. Pursuant to that matter, BI was trying to make intervention through SWAP.

               

Still Rupiah value against USD was predicted to move flat and predictably tend to slump due to lack of positive catalyst, now settled at Rp10,050 – Rp10,100 per USD during closing session last weekend [19/7]. Rupiah was still under pressure by the data released lately was still varied. The market saw positive unemployment data which was predicted to drop from 360 thousand to 344 thousand, but Philadelphia manufacturing index was still weakening from 12.5 to 8.5.

               

Besides, testimony of the Governor of the Fed before the US Banking Committee did not generate to different effect from what he said before the US Congress on May 22 last. So sentiment wise the USD was quite varied. The only thing was that Rupiah tend to be under pressure because it lacked positive sentiment. Apparently investors still feared the stimulus reduction by the US Central Bank. Somehow Rupiah would not nose-dive steeply, since sentiment from the Euro zone was quote comforting as the Greek Parliament approved austerity plan by dismissing 25 thousand Government servants all over the country.

               

On the other hand, the market was still worried about the political condition in Portugal after parliamentary voting for parliamentary trust for the Portuguese Prime Minister was predicted by the market to pass. Now three dominating parties in Parliament were lobbying to find the best solution to overcome political crisis.

               

Only trouble was, there was hardly any positive sentiment at home. The market kept worrying about Indonesia economic slowdown as well as forex reserves which had shrunk to USD 98 billion which means enough for 5 months of import. Therefore if the forex reserves were constantly used for market intervention, it would be drained to a dangerous level. Moreover, demand for USD normally increased toward Lebaran. Besides, the market did not expect too much market intervention by BI since forex reserves was already below the psychological level of USD 100 billion.

               

One thing was sure that BI’ policy to increase BI rate by 75 basic points in the past 2 months did not generate nay positive impact as indicated by national economy which was still in slowdown. Moreover the Government had increased price of oil which led of fiscal tightening so it was feared it would hold back economic growth.

               

At the same time was mounting anxiety of continued economic slowdown in China which was one of the factors of Rupiah weakening. Some analysts suspected that Rupiah slum to below USD 10,000 was deliberately planned by BI because BI ha aggressively increased BI rate. The conclusion was that Rupiah was seeking for new equilibrium against USD in the range of Rp9,900 Rp10,000.- per USD.

               

For the short term it was not easy to expect continued strengthening of Rupiah due to lack of positive sentiment from the internal and external side. Somehow increase of BI rate was expected to generate positive sentiment although not significant enough as there many other economic indicators which showed deficit.

               

Broadly speaking Rupiah, just like other Asian currencies was in the negative zone due to economic slowdown in China. As known, economic slowdown in China could influence Indonesia trade balance and it makes sense because today China was Indonesia’s greatest trading counterpart.

               

It seemed ridiculous how a certain BI official tried to comport the market by saying there was nothing to worry about Rupiah exchange rate value because Rupiah exchange rate value today still represented a healthy economic condition where import and export were well balanced. But bluntly the Central Board of Statistics [BPS] announced that Indonesia’s trade balance last May again sank in deficit of USD 590.4 million.

               

Hence by accumulation, trade balance posted deficit of USD 2.53 billion. Deficit was due to import in May, amounting to USD 16.66 billion, way above export which was posted at USD 16.07 billion.

               

It was possible that the Government’s plan to sell Sukuk State’s Promissory Notes [SBSN] with indicative target of Rp1.5 trillion through auction on July 23, 2013 to cover up some of the financing targets in APBN 2013 could help to prevent further slump of Rupiah. It was reported there were 5 SBSN series in auction, i.e. SPNS2401-24014 [new releases] with return by discount, and assets of state owned goods in the form of land and building. This SBSN would be due by January 24, 2014.

               

Beside the above, Seri PBS001 [relase] with return level of 4.45% and to be due on February 15, 2018. Seri PBS004 [relase] with return level of 6.10% and due on January 15, 2037. Furthermore Seri PBS005 [relase] with return level of 6.75% and to be due on April 15 2043. Series PBS 001Q [new relase] with return level 4.45% would be due on July 15, 2015.

               

The assets used as references for the issuance of SBSN Promissory Notes were projects of the APBN State Budget 2013. Release of the SBSN would be exercised by way of auction run by BI as auction agency. The auction would be open, using the method of diverse prices. In principle all parties, individuals or institutions, could make an offering. However in the execution, offering should be made through auction participant who have had approval from the Ministry of Finance.

               

Besides, the Government also planned to issue a global Sukuk in quarter 3 of this year to cover up deficit in APBN State Budget with benchmark size series of USD 1 billion, but the due date of the bond had not been decided yet. Previously the Government had released bonds in USD denomination worth USD 1 billion in early July. This bond of 10 years tenure brought highest yields since 2010, i.e. 5.45%. In April 2013 the Government had also released Dollar bonds worth USD 3 billion.

               

This year, the Government allocated issuance of forex-based SBN at 18% of the total SBN release plan of gross SBN this year worth Rp332 trillion. Perhaps this news could breeze out hope in the market which would contribute to Rupiah strengthening.

               

Unfortunately in the latest projection the International Monetary Fund predicted current account deficit would continue to prevail in Indonesia for the next 5 years. This made investors slightly doubtful about Rupiah prospect for the mid-term, considering that the position of current account was one of the fundamental criteria which was most important in the valuation of a currency.

               

BI also rated that global economy still tend to slowdown and was full of uncertainty. Economic growth in the USA was predicted not to be as strong as expected, in spite of improvement in production and consumption. Nor was Europe showing any sign of progress.

               

Meanwhile economic growth in China and India was posted as less than early projection, although still notably high. The speculation around the Fed reducing stimulus also affected global economic condition, resulting in capital reversal in the emerging markets.

               

Besides, export performance was still under pressure due to low demand and lowered world’s commodity price with import including oil-gas still going up. Meanwhile forex reserves had always been used up and fell to the level of USD 98.1 or equal to 5.4 months of import payment of Government’s overseas debt.

               

Therefore it was indeed for BI to ease Rupiah restlessness when they, on July 18 last ran the pr imer Fx Swap auction which was responded positively by the market. BI offered targeted SF Swap of USD 500 million auctions of 1, 3, and 6 month tenure. Total offer that entered came to USD 1,240 million USD and way overscribed. Of the total offer the Fx Swap being won was posted at USD 600 million Such indicated how strong the market trust was in liquidity in the domestic market, especially forex liquidity. The Fx Swap auction was one of the policy mix executed by BI with objectives. Firstly it was part of BI’s monetary operations for forex and Rupiah validity in the market.

               

Secondly as hedging instrument for investors or businesspeople against the risk of Rupiah fluctuation in case of liquidity need. Thirdly as an effort of BI to enhance in-depth market intervention through efficient and transparent pricing, and diversification of instrument in managing their liquidity.

               

BI was certain that the policy mix that they adopted would strengthen Rupiah stability, control inflation, and stabilize monetary system as a whole. Increase of BI rate or deposit facility which had been run was believed to mitigate temporary effect of oil price increase on inflation so inflation could be expected subside by September 2013.

               

Rupiah exchange rate value was rated to portray market condition and fundamental economy. Similarly adjustments of SBN yield at the primary and secondary market were rated as high enough. The extremely attractive yield and strengthening of market trust was a momentum for investors to buy monetary asset at the domestic market.

               

To anticipate increasing inflow of portopolio investment to Indonesia, in the future BI planned to run SWAP auction regularly. The objective was that FXSwap could be used as hedging instrument for investors as well as to deepen their actions into the moneymarket in Indonesia.it seemed reasonable if Rupiah value would move in the range of Rp9,950 – Rp10,050 per USD with tendency to strengthen moderately.

               

The Capital Market

               

Just like Rupiah, last week [19/7] IHSG was predicted to strengthen moderately in the range of 4,700 – 4,750. If this range could be arrived at, it would have the chance to continue over the week in the range of 4,725 – 4,775. As with last week’s closing session it was still influenced by lack of sentiment as the market was still watching emitent’s performance.

               

Previously during session on Thursday [18/7] IHSG was closed to strengthen by 41.43 points [0.89%] to the position of 4,720.435. Trade volume dropped but total transaction rose. Foreign investors booked net sell with downturn of buying transaction and upturn in sales transaction. Domestic investors booked net buy. Strengthening of IHSG was driven by the property and financial sectors where index was posted to increase by 1.53% and 0.89% respectively. Increase of IHSG was supported by strengthened regional stockmarket following positive sentiment from the USA.

               

Positive sentiment emerged as the Governor of the Fed, Ben Bernanke, state that stimulus reduction would not be set, timing wise or magnitude wise. The Fed would be flexible so stimulus could be reduced promptly extended according to the data which represented economic condition. On the other hand increase of IHSG was still limited by the Rupiah factor and yield of State Promissory Notes [SUN]. In short, there was still lack of sentiment and the market was still waiting for report of the emitent’s performance of quarter II-2013.

                 

As footnote, the US stockmarket strengthened during session on Thursday [18/7] after weekly jobless claim reported downturn. Weekly jobless claim dropped by 24,000 to the level of 334,000, below the previous revised data of 358,000. In addition to that survey by the Philadephia Central Bank on manufacturing showed increase to 19.87 in July against 12.5 in June, which was the highest reflected level of optimism in the manufacturing sector.

               

Meanwhile financial report of the second quarter was felt as disappointing, after Google Inc and Microsoft Corp reported company’s income and profit below expectation. Moody’s also increased outlook of US economy from negative to stable and rated that although economy was moving at moderate level, the US economy was progressing faster than other countries. Moody’s also again gave AAA rating to US Souverign debt.

               

On the other hand, the Europe stockmarket was closed to strengthen on Thursday session, being uplifted by US economic data. Manufacturing data was also better perceived by the market as the data was positive portrait of US economy. However, the data was not regarded as a signal of monetary stimulus change by the Fed such as non farm payroll of the US Ministry of Labor.

               

Many analysts and economists recommended that the stimulus package be maintained considering that a number of targets were not met, such as unemployment and economic growth. The stimulus could bring psychological impact on the market and bring positive affect on American investors as well as marketplayers in other parts of the world.

               

By statistics, the most influential stockmarket were the stockmarket of the USA and Hong Kong. If the US stockmarket were positive, the impact on Asian stockmarket would also be positive, especially that of Hong Kong, China and Japan. If Asia’s stockmarket was positive, shares market in Indonesia would also be positively influenced in the same way.

               

As footnote, the low global economic growth had its great impact on natural resources [SDA] business. This also resulted in lowered demand fro credit, so banks had to pipeline corporate credit to other sector. Today, to pipeline credit to the SDA sector was rated as inappropriate. This sector held the risk of default as commodity price continued to drop as domestic supply was high but overseas demand was low.

               

To anticipate lessening of credit to SDA, some banks shifted their focus of financing on corporate of the consumer goods sector, and agricultural sector. One thing was sure demand for corporate credit would grow normally although regulators increased BI rate. Understandable because people’s purchasing power was high so companies could rely on a vast market opportunity. Corporate who supply domestic need could still grow normally in the restless economic condition.               

               

The only thing was that the property sector would be under pressure pursuant to BI’s new policy for mortgage [KPR] and credit for apartment [KPA] with LTV ratio gradually bigger. Word was out that the new regulation would be released and to be effective per September 1, 2013 soon, naturally this new regulation would reduce property demand especially KPR and KPA for type 70 and up or type 70 down. (SS)       

Business News - July 24,2013