The Fed’s shocking decision not reduce stimulus had revitalized the moneymarket globally. Governor of the Fed Ben Bernanke stated last Thursday [19/9] that the bank was still continuing buying till end of this year. But all depended on economic growth in the future. Besides, Bernanke stressed that the Fed had no plan to increase rate for the short period.
The following were the impact of the Fed’s shocking decision : At the stockmarket and moneymarket, value of Australian Dollar, Euro and Pound in England jumped up steeply, while greenbuck slumped because it indirectly injected strength to the emerging markets to rally over the next few years ahead. Market of emerging nations were getting highly positive sentiment. The public was not expecting that the Fed would generate anxiety, in the next few weeks their action would mean positive for the moneymarket and stockmarket.
The positive impact also spread out to Southeast Asia. IHSG increased by 7% while index of stockmarket of the Philippines rose by 3.6%, while Rupiah, Malaysian Ringgit and Korean Won strengthened by 1% - 2% against USD. Investors aggressively increased risk of their fundamental economy.
The stockmarket in Asia like index of Nikkei strengthened by 1.8%, index of Shanghai inched up by 0.2% but index of Kospi inched down by 1.1%, index of Hang Seng increased by 1.7%, index of Thai Set increased by 3.2%. in case of gold for contract of December rose by 4.3% to USD 1,364 per troy ounce. Meanwhile price of silver rose by 7.6% to USD 23.3 per ons, but index of Dollar DXY dropped to its lowest level since early this ear.
Positive sentiment also came from the candidate successor of Ben Bernanke in January 2014. As Laurence Summers, a close friend of Obama, resigned as candidate, competition would be easies. Another candidate, Janet Yellen who was Bernanke’s deputy, would make things more open. Yellen, with her competence comparable to Bernanke would be advantageous to stockmarkets of the developing countries, and she who was supported by Wall Street, would continue Ben Bernanke’s program.
Other possibilities according to senior forex analyst at Saxo Capital Markets Jeffrey Halley was that aggressive rally on currencies was only short-term process because it triggered other central banks to devaluate their currencies; the objective was to maintain comparative advantage.
The G 10 group must come up with more accommodative policy to minimize differences in currencies. The world was on the brink of currency war if the Fed did not reduce stimulus by October of December next. Surprise by the Fed in times of anxiety of Yen’s weakening had given Japanese exporters unfair advantage. Japan was criticized by G-20 in their meeting on April last.
The Fed’s policy would support strengthening process of Yen. On the first day the Australian Dollar rise by 0.95 USD, since it was extremely under pressure since June, while Poundsterling jumped up by around USD 1.6 to highest level since January. Euro reached highest level since February, increasing by USD 1.35 per USD.
The USD did not flop against Yen as much as against other currencies. On Wednesday last week [25/9] before the Fed exercised their policy, USD strengthened to 97.75 but slumped again to 98.10. This was influenced by the Bank of Japan who balanced the Fed’s policy. A joke bursted out saying “Thank you Mr Bernanke” by some investors at the Indonesia stockmarket. Investors had reason to be happy because the Fed decided to inject stimulus of USD 85 billion every month.
The stockmarket had invigorated stockmarkets all over the world, including Indonesia. IHSG rose by 4.65% to become 4,670.7 on that day, foreign investors made net byuy of Rp1.05 trillion from BEI. IHSG upturn was also followed by Rupiah strengthening. Rupiah managed to bolster up to Rp11,424 per USD.
One thing was sure the Fed’s decision shocked many investors, because previously marketplayers predicted the Fed would reduce stimulus by USD 10 billion to USD 15 billion of the total USD 65 billion. If this was done, the stockmarket and moneymarket would be stormy once more.
The predicted was reasonable, because by the time Bernanke reduced bond buying or Quantitative Easing on May 22 last, investors instantly panicked. They rushed to release by investors was clearly seen in nearly all stocmarkets of the world, BEI being no exception.
Through June 2013 there had been Rp20.7 trillion foreign net sell at the stockmarket. Furthermore for 2 weeks in July, there was posted net sell of Rp4.5 trillion and IHSG sank to around 4,100 – and yet for over 6 months IHSG had been well settled at above 5,000. The foreign net sell had also caused Rupiah value to fop. Since mid August to September 17 2013 Rupiah had nosed dived to Rp11 thousand per USD.
It was not only stocmarket and moneymarket which were shaken in Indonesia. The Fed’s plan also made regional currencies to slump. India’s Rupee, Korea’s Won, the Philippines Peso, Taiwan’ Dollar and Malaysian Ringgit again fell. It was understandable that the stocmarket and moneymarket in Asia were shaken. As know, through 2009 to 2012 fund from QE phase I, II, III in the USA flowed to the emerging nations including Indonesia, resulting in stockmarket and SUN bonds to be so activated.
Now again the Fed launched the monetary stimulus program. This decision means fortune to Indonesia’s economy, at least in one to four months ahead. Such was some analyst viewpoint. It was true that the Fed’s decision had made price of shares and Rupiah to strengthen; but remember it was not because Indonesia macro-economy had turned better.
Today Indonesia’s economy was being tormented by four deficits at the same time : deficit in trade balance, deficit in current transaction, deficit in payment balance and deficit in primary APBN Budget. Through Semester I-2013 trade balance posted deficit of USD 3.31 billion and by Quarter II 2013 deficit of current transaction had come to USD 9.8 billion or 4.4% of GDP.
This means that Indonesia’s economy was still vulnerable to capital flight in high amount the way it happened last June and July. Moreover Bernanke signaled that reduction of stimulus might happen any moment. It was true that the reason for the Fed to suspend stimulus was because data of US economy was not so good. Once the Fed revised US growth was predicted to be only 2.9%-3.1% against the previous 3.0%-3.5%.
However, it did not mean that the Fed cancelled their plan to axe stimulus. If data showed economic prospect was better, the Fed might take action this week. Naturally, Bernanke’s statement was not to be underestimated, the way the Government of RI under estimated before. The point was that the Government must use the waiting time as momentum to improve national fundamental economy. The Government and BI must not waste time.
Tappering off policy by the Fed was bound to happen soon or late. Most likely it would be early 2014 and end in September 2014. When QE III stopped, the Freed planned to increase interest rate in Semester II 2015. Therefore the Government of RI and BI should make the best of the momentum. BI could consolidate forex reserves using swap agreement as instrument and to increase reserves in USD.
In addition to the above there was possibility that [BI Rate] could be increased by around 25 basic point to become 7.5% in Quarter 4 of 2013. Portofolio investment could also be expected to return to Indonesia. In short, now the Government and BI could take a breath for a moment and ready to anticipate the execution of the Fed’s Tappering Off plan.
The Government’s Four economic package Plan was also expected to be implemented soon to anticipate the Tappering Off Plan, especially to enable the domestic industry not to be dependent on imported raw materials.
The First Package to improve balance of current transaction and to Support Rupiah value.
Step One: to promote export, and tax reduction for labor-intensive based export commodities with export at least 30% of total production and to reduce import oil and gas by promoting use of biodiesel. Step two to stipulate import of luxurious goods from the present 75% to 125%-150%. Step Three: to improve export of mineral products and to ease quota.
The Second Package :
To maintain economic growth and to maintain fiscal deficit in the range of 2.38% and increase tax reduction for labor intensive industries.
The Third Package:
To maintain people’s purchasing power and control inflation level.
The Fourth Package :
To spur on investments. So the conclusion was Although Bernanke had stated not to exercise QE III this time it was not impossible that the plan would be exercised next year. Perhaps not totally but gradually in line with the US economic development.
Business News - October 2, 2013