PRESIDENTIAL ELECTION IS DETERMINANT FACTOR TO RUPIAH AND IHSG COURSE

Rupiah exchange rate value might improve to as low as Rp11,400 per USD assuming that political condition in Indonesia changed for the better. If Presi­dential election runs well there would be psychologi­cal impact that foreign capital might flow in.

Indonesia's fundamental economy was basi­cally not bad, so even if there was Rupiah weakening it must be temporary. Rupiah could be expected to be in the range of Rp11,000 - Rp 11,500 per USD exclusive of global sentiment. However it was not impossible that USD would solidify to as strong as Rp12,000. Such was the negative scenario if Presi­dential election failed to run well.

On the other hand, opinion came up about the need of a new pradigm for Rupiah exchange rate value. Hopefully there should be no more belief that Rupiah strengthening was a positive thing, and weak­ening a negative thing. Today USD was in the range of Rp11,800 if the exchange rate was forced to be at Rp9,500 it would worsen national fundamental econ­omy. If trade balance was in the state of deficit, it was not advisable for Rupiah to be strong.

Today the Government needed proper policy to strengthen fundamental economy. BI had applied extra tight monetary policy, as indicated by bench­mark rate which was today at 7.5%.

Besides, if the Government wished USD to be in the range of Rp9,700 it would drain forex reserves. If exchange rate was maintained as it is, while deficit in trade balance was going on, forex reserves would be used up. One thing was sure, toward Presidential election Rupiah would remain to be under pressure. Besides, the market was also anxiously waiting for election outcome on July 9 next.

Predictably until Presidential election Rupiah would be in the range of Rp11,500 - Rp11,700 per USD this assumption was inclusive of Indonesia's beterred fundamental economy.

The Moneymarket

Last Thursday I12/61 Rupiah value against USD managed to strengthen as Meeting of the Board of Governor of BI decided to maintain BI rate at 7.5%. At Non-delivery forward [NDF] transaction Rupiah was posted to strengthen by 20 points or 0.17% at Rp11,789 per USD compared to Rupiah value at Rp11,810 per USD.

Meanwhile BI mid rate posted weakening to Rp11,813 per USD, a downturn against previous lev­el at Rp11,804. According to' BI Rupiah value against USD was depreciated in May 2014. Rupiah on the average weakened by 0.81% against previous month to become Rp11,532 per USD.

By point to point [PtP] Rupiah was depreci­ated by around 0.9% and closed at Rp 11,675 per USD. Pressures on Rupiah was on account of corpo­rate demand for USD which tend to increase season wise for payment of overseas debt and repatriation of dividend and interest coupon by foreign investors. Besides Rupiah value was also influenced by inves­tors waiting for Presidential election on July 9 last. However, further pressures on Rupiah was eased by foreign capital inflow.

During opening session last Friday [13/6] BI mid rate would be in the range of Rp11,800 - Rp11,200 per USD. Marketplayers were seen to be worried with unchanged BI rate, inflation, and Rama­dhan fasting month. With reference to BI's assess­ment, there were still some visible risks ahead coming from external or internal.

BI also saw inflation risk on account of new policies adopted. The Government's plan to increase Basic Electricity Tariff [TDL1 would have its inflator impact. For that matter BI was to balance up inflation risk, current transaction and economic growth.

In Q 11-2014 Indonesia's economy was pre­dicted to be better than the first 3 months of this year. 131 even predicted that Indonesia's economy growth in Q 11-2013 could be 5.3%, higher that in Q 1-2014 at 5.21%. But compared to economic growth in Q 11-2013 was 5.81%, so economic growth in Q 11-2014 was way below. Season wise economic con­dition in Q II would increase marked by increase of import.

High import, especially import of non oil-gas was in anticipation of increased demand for goods and services toward the Ramadhan fasting month and ldul Adha, while some raw materials and auxil­iary goods was still imported. All in all import also increased. So far movement of consumption and in­vestment was still consistent.

The presidential election was believed to jack up people's consumption; but contribution by in­creased consumption was not too high because the election was any run in one round. Economists estimated economic growth of Q 2 - 2014 was around 5.3% - 5.4% supported by increase of domestic con­sumption toward Ramadhan fasting month and Idui Fitri. By end of 2014 predictably Indonesia's econom­ic growth would be around 5.3% - 5.5%.

Beside consumption, in Q 11-2014 there would be growth in direct investment [PMTB]. Evidently in April 2014 BI posted credit investment worth Rp 822.4 trillion, an increase of 1.92% against March 2014 at Rp 806.9 trillion. To illustrate, in Q-I 2014 BPS posted direct investment growing by 5.13%.

From the above picture it was clear that Ru­piah had the chance to strengthen in the range of Rp11,750 - Rp11,825 per USD during closing ses­sion last weekend [13/6]. If that level was attained there was chance for continued strengthening this week at Rp11,700 - Rp 11.800 per USD. This was thanks to ECB's policy which axed benchmark rate in the hope to bring betterment to Indonesia.

The point was that downturn of Europe's benchmark rate could make foreign investors relocate their capital to developing countries like Indonesia. The signals of potential inflow of foreign capital due to ECB's policy was caught by BI. ECB's axing of inter­est would influence foreign investor's strategy.

Axing of ECB benchmark rate was predicted to ease pressures of international interest which had the potential to increase as the Fed increased bench­mark rate from 0% to 0.25% today and planned to do Tappering Off.

Reduced international interest pressures was on account of the Fed's and ECB's plan, balanced by low inflation would have positive impact on Indonesia.

The point was that all would be favorable to global economy and foreign capital inflow to Indonesia. As footnote last week President of ECB Mario Draghi an­nounced downturn of fix deposit interest to minus 0.10% from 0% and axed benchmark rate from 0.25% to 0.15%.

So there was high potential of foreign capi­tal entering Indonesia by the effect of axing of ECB benchmark rate. But possibly capital inflow was rela­tively small since ECB benchmark rate was already low while the Fed's interest rate would increase. So foreign capital would flow in to Indonesia due to ECB's policy and after the Presidential election.

Broadly speaking, pressures on Rupiah would continue to be reduced and stop in Q IV this year. Political turbulence triggered by Presidential election would have its effect felt by the time the new Presi­dent was elected. The elected new President would motivate industrial players to continue their business plan. Such would contribute to creating a condusive state to reducing national trading deficit.

Strengthening of Rupiah would not probably happen until early 2015. Such was because economic condition was stabilizing. The chosen President was beginning to implement his policies while the cabinet would probably be active. A stable political condi­tion next year would jack up export and high export would keep USD from flowing out of the country and such would strengthen Rupiah.

So far pressures on Rupiah was not to hard because weakening was halted by inflow of foreign capital which kept getting better in line with domes­tic economic projection. By May, inflow of foreign capital in portofolio was posted at USD 11.04 billion. Thanks to support of foreign capital, Indonesia's forex reserves had increased to USD 107 billion, enough for 6.2 months of importing and 6 months of overseas debt payment.

Support by the Asia Development Bank [ADB] that investors better drift attention to some countries in East and Southeast Asia considering the bright eco­nomic prospect in that region could generate positive sentiment on Rupiah. Most of the bond markets in Asia were booming once more. They were among others: China, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, Vietnam and Brunei Darusalam.

The Capital Market

Index of IHSG during initial session at BEI on Monday last week 19/61 was moving in the geen zone. IHSG was opened to move p to the position of 4,945.84. Index increased by 7.11 points [0.14%] to become 4,944.29. 93 shares was posted to move up, and 59 shares remained stagnant. Total transac­tion value came to Rp 299.999 billion. Index was entering a phase of consolidation and was weakening.

Evidently, to end trading last Thursday [12/6] IHSG was collected by 37.539 points [0.76%] to the level of 4,934.407. Meanwhile index of LQ 45 was axed by 7.554 points [0.90%] to the level of 834.527. Index once nosed down to its lowest level at 4,920. Acts of selling was happening in second tier premium shares. Seven sectors weakened and only one sector strengthened, i.e. basic industry.

Foreign capital parked at BEI amounted to Rp42.1 trillion, while transaction by foreign investors was posted to make foreign net buy worth Rp463.2 billion in all markets. Trading was running moderately with transaction frequency worth 178,736 times at the volume of 5.979 shares worth Rp 5.487 trillion. 80 shares went up, 192 shares went down and 93 shares remained stagnant.

However, axed projection of economic growth by the World Bank generated negative sentiment on Asian stockmarkets. Only Singapore's stockmarket managed to stay strong. Index on Nik­kei 225 weakened by 95.95 points [0.64%] to the level of 14,973.53. Index of Hang Seng inched down by 82.27 points [0.35%] to the level of 23,175.02. Index of Composite Shanghai inched down by 3.24 points [0.16%] to the level of 3,293.47 while ma­jority of shares at US stockmarket weakened during session of Thursday [12/6] local time.

Index of Standard & Poor's 500 inched down to 1,930.11 while index of Dow Jones Industrial Av­erage inched down by 0.7% to 16,734.19. Price downturn was seen in index of Nasdaq at 0.8%. Movement of some shares influenced the US stock­market, among them Delta Airlines Inc 5.9% which fell by 5.9%. Diamond Offshore Inc increased by 3.2% .and Noble Corp up by 3.2%. Meanwhile shares of Intel Corp went up by 3.8%.

Downturn of US stockmarket was triggered by act of shares selling of consumer goods sector as violence in Irak jacked up world's oil price to its high­est level in the past 8 months. Increasing violence in Iraq in Northern and Central Iraq increased probability of civil war in Iraq. And yet Iraq was the world's sec­ond largest oil producer by OPEC standard.

Violence in Iraq was an influential occurrence in Iraq to the oil market. Today Iraq was striving to increase their oil production output, but today they were trapped in an unending conflict.

Now investors were focusing attention on Indonesia's macro economy a main reference. Indo­nesia's inflation continued to improve in the past 5 months till May, i.e. 1.56% accumulatively, which was still in line with inflation target between 3.5% -5.5% while trade balance again posted deficit of USD 1.96 billion in April [March surplus on USD 0.67 bil­lion] partly due to seasonal increase of import in Q 2 this year.

In contrast with positive news in inflation, trade balance again fell into deficit of USD 1.96 billion in April after surplus of 2 consecutive months [March surplus of USD 669 million, February surplus of USD 843 million] This big deficit in trading was mainly due to increase in import of non oil-gas products USD 2 bil­lion [MoM] due to seasonal factor and export of non oil-gas which was posted to drop to become USD 890 million [MoM] due to downturn in primary corn: modity prices [coal and CPO] and downturn of export, especially to China and India].

To step up financial account might ease anxi­ety over widening deficit in current transaction IDTB1 in the next 2 quarters. Direct Foreign Investment [FDI] remained strong at USD4.5 billion in the past 2 quarters. Increase of portofolio investment became USD 8.5 billion in Q-1 versus USD 1.6 in Q-4 last year contributed to balance of payment.

Inflow of portofolio investment would con­tinue in Q-2 as foreign ownership over Indonesian promissory notes hit record of Rp394 trillion per May 2014 [35.7%] of total bonds. So far at the stock­market inflow of foreign capital came to Rp 1.6 billion in Q-2 of 2014. This indicated foreign investors' trust in Indonesia’a balance of payment and was positive catalyst of the Presidential election on July 9.

The local stockmarket stayed energetic in 2014 with IHSG index setting target at 5,300 based on PIE ratio of 14 times in the next 12 months hence market correction amidst trade balance which re­mained in deficit in Q 2 and Q-3 2014 means an op­portunity to buy.

The only thing was that investors must con­sider Government's decision to increase basic electricity tariff as per July 1 next, for non public com­panies and household as per 1,300 VA which would put extra burden on inflation.

The basic electricity tariff increase for house­hold category of 1,300 VA would bring inflator effect of 0.33% while increase of electricity tar­iff for non public companies would bring effect of 0.22%. So in total, resulted inflation came to 0.53%.Although there would be pressures on inflation, BI was still sure that inflation would still be within target this year at + 4.5%.

Increase of electricity price was happening to 6 subscribers categories of PLN exercised gradually and to begin by July 1, 2014. The Six subscriber cat­egories to be increased in price were:

Firstly,        1-3 industry category [closed companies]

Secondly,     household R-2 [3,500 VA to 5,500 VA]

Thirdly,       government P-2 [above 200 kilo VA]
Fourthly,      household R-1 [2,200 VA]

Fifthly,        street illumination P-3

Sixthly,       household R-1 [1,300 VA]

Increase of electricity tariff forced food and beverage sellers to increase selling price by 1%. As planned, F&B sellers would increase prices after Idul Fitri. As known, electricity as price component such as for packaging would increase, and so was raw materials. On the other hand, F&B sellers regretted Government's plan to increase TDL without consider­ing companies' yearly plan. They state that sudden increase of electricity tariff made company's plan to go astray.

Businesspeople of other business lines would suffer from the effect of electricity price increase directly or indirectly as it would jack up production cost. All in all electricity price increase was inevitable and company's profit margin would be eroded. Investors must observe every emitent's strategy in responding to electricity tariff increase. In that case IHSG during closing session last week [13/6] would move in the range of 4,950 - 5,000 this week. (SS)

Business News - June 18, 2014