RUPIAH AND IHSG ASCENDING AS BI-RATE SETTLES

Over the week Rupiah and IHSG were projected to continue strengthening. The strongest drive was from meeting outcome of the Board of Governors of Bank Indonesia [RDGBI] which stipulated benchmark rate at 7.5% which met market’s expectation.

The policy was regarded as being consistent and synchronous with the effort to set inflation at 4.5% + 1% and to lessen deficit in current transaction to a healtier level by end of 2014.

BI saw data development which showed inflation being under control. Data released by BPS showed that inflation was posted at 0.26% in February, so annual inflation dropped to 7.75%. February inflation descended nicely against previous month at 1.07% or 8.22% annually.

As with deficit in current transaction [DTB] the Monetary Authority could be suppressed to below 3% if GDP after previously by end of 2013 came to 3.26% of GDP. Deficit in January at USD 430.6 million was seen by BI as momentary swing. Downturn of mineral ore export was also predicted to be temporary.

Export of manufacturing posted upturn, while trade balance posted surplus. The bright side of it was that financial balance would continue to improve due to high inflow of foreign capital. By February 2014, BI posted inflow of portofolio capital to Indonesia’s financial market at Rp34.6 trillion this was the factor that made Indonesia’s forex reserves rise impressively to US$ 102.7 billion. BI felt sure that foreign investors would be attracted to invest more in this country if Indonesia’s fundamental economy were reassuring.

Besides, the well guarded macro economic also generated positive sentiment to the market. In this case the Ministry of Finance predicted trade balance would improve this month. Probably trade balance would be more or less the same in January-February. As with Rupiah which had been strengthening in the past few days, it was not really noteworthy as the volatility was still low and the value tend to be stable. Rupiah strengthening was a plus point thanks to high demand for Rupiah which means positive sentiment for Indonesia.

Beside the trend of backflow of foreign investors to the emerging market like Indonesia was believed to be cause of betterment in trade balance. Indonesia was regarded as low risk destination by investors.

The Moneymarket

It came as no surprise when Rupiah was closed at Rp11,383 per USD last Thursday [13/3]. Garuda’s position inched up by 0.4% against that of the day before at Rp11,452 Rupiah progress continued in morning session last Friday [14/3] toward six times weekly strengthening consecutively.

Rupiah value was posted at Rp11,141 per USD. hence early this year, Rupiah strengthening had come to 6.5%. Rupiah strengthening was the greatest among 31 main currencies in Bloomberg’s data. Rupiah might was regained last week when foreign investors started to buy Indonesian assets. The existing data showed that foreign capital entering the domestic bond market was notably high.

By February last, foreign capital entering the domestic bond market was Rp16.13 trillion, up by 212.5% against January 2014 at Rp5.16 trillion. The inflow of foreign capital did not only affect ORI transaction but also all Government’s bond instruments. Investors had growing appetite for Indonesian assets in line with the country’s bettered fundamental economy.

BI’s Board of Governors decided on Thursday [13/3] to maintain BI benchmark rate at 7.50%. This was the third time that BI maintained Bi-rate this year. BI also maintained magnitude of lending facility at 7.50% and deposit facility at 5.75%.

The policy was synchronous with the tight money policy to time inflation target 2014 and 2015. BI also planned to strengthen monetary mix and macro-prudential policy, to continue in depth market probing and to increase coordination with the Government in controlling inflation and deficit in current transaction.

The policy mix exercised by BI and the Government was rated as supportive to economic stabilization effort. This was evident in inflation being under control and reduced deficit. In the future, BI would to observe various risks, global or local and prepare anticipative step and take anticipative measures to ensure that  macro economy was well protected.

The Government was also optimistic about Rupiah prospect. Deputy Minister of Finance Bambang PS Brodjonegoro stated that the potential of Rupiah to strengthen in 2014 was high. There were there factors which influenced rupiah value this year.

Firstly, economic recovery in developed countries particularly the USA. Bettered US economy was seen in downturn of unemployment figures and volume of Tappering Off being under control.

As known 45% of the world’s economy was dependent on US economy. So if US economy changed for the better, indirectly it would bring positive impact on developing countries including Indonesia. US economic recovery would be benefited by developing countries to step up export performance. Indonesia could grab the golden opportunity to promote export of premium products like coal and CPO.

Secondly, stable fundamental economy at home unlike 2013 when overseas demand for Indonesia’s export was low; but now their demand was increasing again and Indonesia’s balance of payment turned surplus. The positive condition made deficit to shrink last data showed that deficit against GDP in 2013 came to 1.98% of GDP.

Good fundamental economy brought double impact, i.e. foreign capital flowing in and rupiah strengthening. To maintain stability of fundamental economy, the Government was setting up policy package phase III with the objective to lower deficit to 2.5% against GDP through 2014. Latest development in policy package phase III was still at the stage of discussion the points to be included, among which repartiation of companies.

The third factor was the bonus factor was the bonus factor, i.e. Indonesia was gradually stepping out of the Fragile Five group of countries thanks to reduced deficit. Fragile Five was the term given to countries with sizable deficit in trade balance, i.e. India, Indonesia, Turkey, Brazil, and South Africa. At the G-20 meeting in Australia recently, many members complimented Indonesia for her reduced deficit. Indonesia’s exit from Fragile Five generated positive impact on the market which tend to enhance capital inflow. To maintain investment, hindrances to investments like land clearing and business permit procedures must be made easy.

Return of investors to the emerging markets like Indonesia was rated as one of the factors that caused trade balance to improve. Global investors were returning to the emerging markets like Indonesia where risk was low. Indonesia was rated a country that quickly responded to market demand and this was seen in good performance in current transaction.

The quick response was seen in BI’s step to tighten monetary policy by increasing benchmark rate by 125 basic points starting from June 2013 to 7.5%. And the Government increased price of subsidized oil at the same month to put brakes on oil importing which had been the culprit of widening deficit.

Accordingly, Deficit in current transaction in quarter IV/2013 narrowed to USD 4 billion or 1.98% of GDP after widening to USD 9.9 billion or 4.4% against GDP in quarter II/2012. Although Indonesia was already excluded of the Fragile Five, the Government claimed they would continue structural reformation and step up performance of current transaction. The Government strived to maintain deficit at 2.5% against GDP this year, lessening against last year’s attainment at 3.26 against GDP.

The Government remained consistent about running tight fiscal policy. The same was with BI who announced repeatedly to run tight money policy this year. Hence economic growth this year would be moderate and would predictably soar up next year. Chances were Rupiah would continue strengthening last week end [14/3] in the range of Rp11,325 – Rp11,375 per USD to be publicized on Monday. This process would predictably continue this week and might even exceed Rp11,300 per USD.

The Capital Market

During transaction last Thursday [13/3] index of IHSG was closed to strengthen by 41.782 points [0.89%] to the position of 4,726.167. Highest intraday was 4,726.167 and lowest 4,637.291. Trade volume and total transaction went up. Foreign investors posted net buy of Rp1.21 trillion with increased buying transaction and downturn of sales transaction while domestic investors posted net sell.

Looks like IHSG was back in the positive zone as there was buying spree among marketplayers to buy shares which were previously weakening. The growing expectation among marketplayers that BI rate would be maintained amidst weakening of some share index in Asia and anxiety over continued downturn of IHSG.

Acts of net buying by foreigners and Rupiah rebound contributed to energizing IHSG to move up to higher level. Nearly all shares sectors were having rally especially the consumers’ sector which took the lead in upgoing after BI-rate was set because presumably soon people’s buying power would not slump.

During transaction last Friday [14/3] IHSG was expected to strengthen in the range of 4,700 – 4,750. By positive sentiment and release of BI rate, Rupiah appreciation  and foreigners making net buy, it was expected that IHSG would resist in the green zone although IHSG during early session I last Friday [14/3] slumped to 4,683.59 after being slashed by 0.9%. Foreign investors were having net buy up to Rp5.5 trillion.

Index slumped since opening level at 4,726.16 IHSG was losing steam after being rescued by sentiment from BI-rate at 7.5% Index was for the time being already at lowest level 4,676.55. Downturn of index was in line with descend of shares at the basic industry sector to the bottom level of 1.2% followed by shares of the consumers’ sector at 0.3%.

Meanwhile the US stockmarket during transaction last Thursday [13/3] slumped to the bottom level in the past 5 weeks. Index of Dow Jones dropped by 1.4%, index of S&P stepped down by 1.2%; index of Nasdaq went down by 1.5%. Index was suppressed by weakening China’s economy and increasing oil price to USD 98 per barrel. The condition was on account of lesser economic data was below expectation and the tension in Ukraina flaring up once more.

Strengthening process last Thursday which brought IHSG to highest level in the past 8 months made IHSG prone to profit taking. The only thing was that IHSG stood a to continue strengthening over the week in the range of 4,750 – 4,800 thanks to positive sentiment from the domestic side in line with Indonesia’s macro economic recovery.

Indonesia’s definite exit from fragile five also generated positive sentiment to the stockmarket because it indicated that Indonesia’s risk potential had lessened. Besides, Foreign Direct Investment or portofolio investment was predicted to storm in as there was optimism that political climate this year would be safe and peaceful with the new President being premarket. This enlivened zest for the market players to enter the domestic stockmarket. (SS)

Business New - March 19, 2014