AWAITING FOR FED FUND RATE INCREASE IN THE USA

Governor of the Fed Janet Yellen stated that Policy Markers would stay patient about increasing benchmark rate. However they would still consider to increase bank interest.

USD value instantly weekend against most of leading currencies last mid week as Yellen made his statement at the Congress. In her semi-yearly monetary policy report, Yellen again firmly underscore the Fed’s promise to be patient about keeping benchmark rate from going up because it was impossible to do so at least until the next Policy meeting.

Yellen told the Committee of the Banking Senate that although the policy was designed for economic development, too many Americans were still jobless or semi jobless. Furthermore wages growth was still low and inflation was still below the Fed’s long term target of 2%.

USD was still under pressure after Yellen’s comment.  In her two hour meeting with the congress Yellen explained that the committee might increase interest in the next few months. Furthermore the policy makers would erase the word “patient” in elaborating bank interest rate.

And there was possibility of increased bank interest at every meeting. The approach means increase of interest in early June although investors interpreted Yellen’s statement as instant increase of interest.

It was noteworthy that in some countries the Central Bank deliberately let their currency to weaken. Unlike the US Central Bank which started to reduce their liquidity support to the market, this year ECB would go down the market to execute quantitative easing, and this was also the policy adopted by Bank of Japan.

This step automatically made the USD to strengthen. Central Banks of Canada, Australia and India also lowered their bank interest, which was to keep their currency for strengthening significantly. Under such circumstances it was no need to interfere the market. There was lesson to learn from 2013 that market intervention had no significant impact on currency value drain forex reserves instead.

Over the year, Rupiah value had been weakening against USD. However as a whole, compared to other currencies Rupiah had been strengthening. So it was right to say that Rupiah was fluctuating according to the national fundamental factor.

Meanwhile IHSG stepped on the stairway up to the top, breaking through 5,400; investors kept rushing to the domestic stockmarket due to good prospect of some sectoral shares.

The Moneymarket

Rupiah was trying to move up last week (25/2/2015) Downturn of USD index would clash head on against US economic data which was sentiment to determine Rupiah value. Governor of the Fed Janet Yellen showed her satisfaction of economic performance except the inflation factor.

The intention to increase benchmark rate was there, but at least in the next two FOMC meeting Fed rate was almost certain to settle. Increase of the Fed’s rate would soon be preceded by forward guidance. The market responded positively to Yellen’s statement, as shown by index of S&P which increased, return of US Treasury was reduced in tandem with USD index. China’s manufacturing figures was predicted to descend.

Rupiah itself weakened together with most of the currencies in Asia and in tandem with strengthening of bonds. No over-intervention was visible by BI at the currency market. Yellen’s statement which breezed out hope that Fed rate would not increase in the near future generated positive sentiment on Rupiah. However, bad economic data in China could keep strengthening trend of USD in Asia.

Bankers and stock observers rated that diminishing Rupiah value which getting close to Rp.13,000 per USD must be watched on as it might hindrance Indonesia’s economic development. Rupiah at inter-bank transaction in Jakarta last Thursday (26/2) weakened by 16 points to become Rp.12,872 against the previous level at Rp.12,856 per USD.

Rupiah again slumped against USD with growing market anxiety over the situation in Greece as the potential of default was still there.

Some marketplayers were beginning to drift domestic sentiment, i.e. inflation data 2015 and Indonesia Trade Balance of January 2015 to be announced by BPS early this week.

Predictably strengthening of USD against global currencies would continue to happen resulting in lengthy Rupiah downturn. Strengthening of USD continued as some central banks were also weakening their currency against USD.

The apparent “exchange rate war” in global economy was becoming more visible as ECB and BoJ started quantitative easing followed by the central banks of Canada, Australia, Singapore and even India.

The impact on Rupiah value had been visible since end of 2014 when Rupiah was at the level of Rp.11,500 per USD and continued to weaken to around Rp.12,800. Weakening of exchange rate was done to inject stimulus to export, especially export of manufacturing products.

Unfortunately the Indonesian Government did not have the opportunity to benefit from Rupiah weakening as prices of premium export commodities was low while demand from buyer countries were just a low and not supportive to economic growth.

On the other hand, BI supported the real exchange rate system (RER) of Rupiah so although it was weakening against USD, Rupiah remained competitive against other currencies. In fact Rupiah was still strong enough in the “basket” of global currencies, still Rupiah value should be safeguarded.

If Rupiah failed to maintain is value against USD and other currencies, the negative impact would be felt in economic growth rate. If Rupiah continued to sink deeper than Rp.13,000 per USD , Indonesia’s economic growth would be a cry form the targeted 57.7.

Before the USD turn weak against other currencies last Thursday (25/2) Janet Yellen stated in her second day of presence at the Monetary Service Committee that even when the time comes for the Fed to increase interest, they would keep supporting America’s economic and keep watching the labor market to make sure betterment was there time after.

The Fed decided to be patient in terms of interest increase, meaning increase would not be at least until the next few meetings. Furthermore Greenbuck would be under pressure on the second day after Yellen’s statement. USD index which monitored Greenbuck against 6 other currencies was down by 0.29% to 94.223.

BI rated that in spite of the tendency of Rupiah weakening against USD lately, broadly speaking Indonesia’s economic development was rated as satisfactorily good. BI saw that in January there was inflation and in February inflation was under control. Even some Government’s policy to reform subsidy management.

On the monetary side, BI kept watching development in the USA whose economy tend to improve and also to watch Europe and Japan who planned to do quantitative easing. By estimate Rupiah position would be around Rp.12,800 – Rp.12,900 per USD during closing session last weekend.

The Capital Market

IHSG index during early session last week (27/2) slided down fast. Act of profit taking made index to end up at the red zone. To close transaction at session I (27/2) IHSG was at the position of 4,449.17, down by 2.25 points. Meanwhile index of LQ 45 was corrected by 1.41 points (0.15%) to become 958.8.

During opening session, investors were zealous to make a reckord at IHSG. Not long thereafter, profit taking was at target to make the best of index strengthening in the past few days. Act of profit taking caused IHSG to nose dive, touching the lowest level at 5,462.19

Trading was going on merrily, 121,180 transaction took place involving 3.54 billion lots worth Rp.2.95 trillion. 136 shares rose, 106 went down and 85 not for sale. IHSG moved in parallel with regional stockmarkets which tend to be corrected.

Strengthening that happened lately was befitted by stockholders for profit taking at weekend. Index of Nikkei 225 inched up by 28.74 points (0.15%) to become 18.814.53. index of KOSPI went down by 2.8 points (0.14%) to become 1,990.28. Index of Straits Times inched down by 0.19% (0.01%) to become 3,425.99.99.

Apparently BI’s policy to lower BI rate by 25 bps to become 7.5% was responded positively by the stock players; the positive impact was apparent, IHSG broke through 5,400.

Traffic of index would still progress till year end. The progress was attributed to betterment of the sectors of property, construction, infrastructure, and banking. By year end, many analysts projected index could break through 5,600, the lowest level attainable by IHSG. However it was not impossible that IHSG would exceed that level.

As known, BI lowered BI Rate by 0.25% to 7.5% with lending facility of 8% and Deposit Facility of 5.50%. BI’s policy was in line with the effort to bring deficit in current transaction to a safer level.

This year stockmarket would have to compete against bond market. The trend of bond market in Indonesia through 2015 was notably positive as seen in return of current year at 6.14% from 175,89 in January to become 187.14 on February 23 last. Meanwhile IHSG on February 23 posted return of current year amounting to 3.37% from 5,226,95 to 5,403.28.

The value of conventional outstanding Government bond through 2010 – 2014 posted increase every year. By end of 2014 the total outstanding was Rp284.4 trillion an increase of 24.7% (y o y) against previous year.

Meanwhile the value of outstanding Government’s Sukuk (a Syariah based bond) by end of 2014 was posted at Rp.57.8 trillion, an increase of 60.8% against the previous year. Until January 2015 last, realization of Government’s bond release came to Rp.41.37 based on estimated Government’s bond release (February – December 2015) based on RAPBNP 2015 amounting to Rp.266.63 trillion against Rp.308 trillion.

However corporate bonds had their outstanding value by end of 2014 at Rp.47.8 trillion, a downturn of 18.8% (y o y) against previous year. Realization of corporate bonds issuance including Conventionals and Sukuk per January 2015 was Rp.4.8 trillion with estimated value of Rp.60 trillion by end of 2015.

At the secondary market there was Government’s transaction of Rp.16 trillion per day and in corporate shares reaching Rp.700 billion per day. Downturn if BI interest, downturn of world’s oil price, the Fed’ plan to increase FFR, effort to restore economy in Europe, political turbulence at home and efforts to enhance development by the new Government were the factors that governed Indonesia’s destiny through 2015.

From the above picture there was chance that IHSG would rebound during closing session last weekend (27/2) at 5,450 – 5,500. This week, IHSG index was predicted to move in the range of 5,475 – 5,525 by positive sentiment from the Fed’s plan to increase FFR and downturn of BI rate at home last week. (SS) 

Business News - March 4, 2015

AWAITING FOR A PRO GROWTH MONETARY POLICY

Bank Indonesia (BI) had just lowered BI Rate from 7.75 to become 7.5% at the Meeting of the Board of Governors last week. The step was response to inflation expectation which was low and deficit of current transaction being under control in 2015.

Inflation was expected to be low because the Government had adopted the fixed subsidy policy for oil, while price of world’s crude oil was now low. For 2015, inflation was targeted at 3% - 5%. Deficit ratio by end of 2014 was still around 3% of GDP and in 2015 the condition in 2015 would not be too far different.

However, there would be significant change on product pattern. Deficit would be governed by import of productive goods for infrastructure building, not consumptive goods like oil in vast volumes.

Downturn of BI rate been going on for long. Lately, BI rate was down by 25 basic points in February 2012 to become 5.75%. Regardless of polemics over benchmark rate, interest rate for monetary operations which was supposed to be bank’s reference in determining deposit interest, was not much discussed.

Bank interest for monetary operations was reflected in overnight deposit in banks with reference to deposit facility and reverse repo for deposit up to one month with State Promissory Notes (SBN) as instrument.

Deposit facility was facility for Rupiah at BI facilitated by banks, while Reverse Repo was transaction of share buying with promise of resale at stipulated time and price.

In case of three months and six months, the instrument was BI Fixed Deposit Certificate (SDBI) while 9 months deposit was SBI.

In response to BI rate stipulation which was down by 25 bps last week, many economist believed that BI was already growth orientated. Understandable because, unpredictably BI dared to lower BI rate although annual inflation (January 2014 – January 2015) was high enough, i.e. around 6.9%. it seemed hat future expectations was BI’s main consideration in lowering BI rate. Moreover deficit ratio had moved down to 2.9% against GDP by end of 2014 last.

Many economist reckoned BI’s step was inspired by central banks of other countries who lowered benchmark rate with the objective of depreciating their currencies to stimulate export. Now the Mid-rate phenomenon war was getting worldwide, indicated by act to weaken national currencies like in China, India, Australia and Singapore.

It seemed reasonable if anyone believed that BI’s step to lower BI rate would downpress rupiah amidst anxiety over possible rate increase by the Fed this year.

In this case BI argued that through monetary operations, BI interacted directly with banks. Although the micro-prudential management has shifted to OJK by command of the Law the “heart of bank” was still in BI. Monetary operations was needed because banks possessed liquidity excess which was sometimes not absorbable by the moneymarket.

The liquidity excess was then placed at BI. Banks placed their excess of liquidity in a different way, so BI offered the option of one-day, two weeks, one months, three months, and nine month deposit. There must be reason why liquidity excess could not be absorbed by the market. i.e. instruments at the moneymarket was still limited.

As banks turned deeper, the banks who placed liquidity excess at the moneymarket, could anytime convert their instrument into fund, especially for short term purposes. As long as the moneymaket was not too notably developing, banks would place excess of liquidity at BI.

In managing liquidity, BI seemed to be adopting a too tight liquidity policy. Such a perception came up because what judgement was only focused on BI rate which through 2014 resisted at 7.59% and up again to 7.75% in November 2014. And yet from the angle of monetary operations, the bank interest was way below BI rate.

For example in 2014 last, overnight interest referred to deposit facility amounting to 5.75%. bank interest reverse repo for 3 months tenure was 6.5% and 6 month tenure was 6.8%. In the case size of bank interest was imposed for a period of one year. If bank placed for just one day, meaning interest was proportionally set at 1/360 of interest; the same calculation was applicable for fund placement of one month, three months and six months

Only problem was that big depositors referred to BI rate to demand high interest from banks, or even special rate. So the perception that interest war was going on was actually real. If banks could think rationally, they should refer to monetary operation rate, not BI rate.

There was no doubt that lowered BI Rate had its effect on interest of monetary operations. Monetary operation interest was bound to be down, although not as much as reference interest. Monetary operation interest went down close to 25 basic points.

Net Interest Margin/NIM went down not because downturning credit interest but because of increasing cost. So bank should be wise in stipulating deposit interest and be keen eyed in judging which customers deserved high, medium or low interest. Accordingly, bank must have the wisdom to see which fund was cheap and which fund was costly, be re structuring the fund.

Banks must be able to procure cheap fund more than costly fund; banks must not even try to offer high return to deposit products of cheap fund category. In that case banks would have to face NIM’s pressure; pressures could also be from other profitability ratio.

For that matter banks must be eagle eyed to managed people’s fund through effective strategy in either acquisition or retention platform. Expansion of retail customer bases became important compared to corporate customers as most retail customers were not demanding high interest as typical corporate or institutions.

The more individual retail customers enlisted, the better for banks because dependency on one or two big customers could be minimized. With big individual customer’s population, firmness and stability of deposit volume would be better secured. In that case whether BI would lower BI rate or not it would not affect banks too significantly. Bank’s managerial capability was the key solution to maintain bank’s liquidity whereby they could play their roles ad intermediary agency. (SS)

Business News - March 4, 2015

FEBRUARY 2015 DEFLATION 0.36 PERCENT

Development of commodity prices in February 2015 in general showed a decrease. Based on the monitoring results of the Central Statistics Agency (BPS) in 82 cities, in February 2015 there was a 0.36 percent deflation, or a decline in the Consumer Price Index (CPI) from 118.771 in January 2015. Deflation rate by calendar year (January-February) 2015 at 0.61 percent and inflation rate year-on-year (February 2015 to February 2014) at 6.29 percent.

Deflation occurred due to price decrease as indicated by a decrease in indexes of expenditure groups, i.e. foodstuffs 1.47 percent; and transportation, communications, and financial services 1.53 percent. While, other expenditure groups which experienced increase of index include food, beverages, cigarettes, and tobacco group 0.45 percent; housing, water, electricity, gas, and fuel group 0.41 percent; clothing group 0.52 percent; health group 0.39 percent; and education, recreation, and sports group 0.14 percent.

Some commodities whose prices decline in February 2015 include; red chili, gasoline, cayenne paper, transportation rates in the city, purebred chicken meat, purebred chicken eggs, diesel fuel, tomatoes, green peppers, red onions, intercity transport fares, gold jewelry, filtered clove cigarettes, cars, domestic servants salary, dried instant noodles, grapes, spinach and hospital tariff.

In February 2015, expenditure groups that contributed to deflation include: foodstuffs 0.32 percent and transportation, communications, and financial services 0.26 percent. While, expenditure groups that contributed to inflation included: food, beverages, cigarettes, and tobacco 0.07 percent; housing, water, electricity, gas, and fuel 0.10 percent; clothing group 0.03 percent; health group and education, recreation, and sports group at 0.01 percent, respectively.

This group, in February 2015 experienced deflation of 1.47 percent or decrease of index from 127.52 in January 2015 to 125.65 in February 2015.

From 11 subgroups under this group, 5 subgroups experienced deflation and 6 subgroups experienced inflation. Subgroups which experienced the highest deflation are spices subgroups at 17.71 percent, and the lowest was experienced by subgroup of fats and oils at 0.27 percent. While, subgroups with the highest inflation are subgroup of grains, tubers, and products thereof at 2.70 percent, and the lowest was experienced by nuts subgroup at 0.16 percent.

This group, in February 2015, contributed 0.32 percent to deflation. Dominate contributors of deflation include: red chili 0.28 percent; and red onion at 0.01 percent, respectively. Conversely, dominant contributors of inflation are: rice 0.11 percent; dried instant noodles, grapes, and spinach 0.01 percent, respectively.

In February 2015, deflation occurred at 0.36 percent with Consumer Price Index (CPI) at 118.28. Of 82 cities of CPI, cities experienced deflation and 12 cities experienced inflation. The highest deflation occurred in Bukit Tinggi at 2.35 percent with CPI at 114.99, and the lowest occurred in Jayapura at 0.04 percent with CPI at 119.64. While, the highest inflation occurred in Tual at 3.20 percent with CPI at 130.63, and the lowest occurred in Manokwari at 0.04 percent with CPI at 112.50. (E)

Business News - March 4, 2015