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Indonesia cautious as Fed starts meeting
Publication Date : 18-09-2013
Indonesia is currently on alert as the Federal Reserve (the Fed), the US central bank, has begun its two-day meeting to decide on its quantitative easing policy, a decision that might rattle financial markets in emerging economies.
“Our financial market is linked with the US, so we are anticipating the prospect of having tighter liquidity if they proceed with the tapering plan,” Robert Pakpahan, head of the Finance Ministry’s debt management office, said on Tuesday
To expedite economic recovery, the US central bank currently injects US$85 billion of liquidity a month in the form of a bond-buying program, and top Fed officials will convene on September 17-18 to discuss the possibility of reducing the amount.
Indonesia’s financial markets are considered among the most exposed to the tapering of US stimulus, mostly due to their heavy dependence on foreign investors.
The rupiah has fallen 16 per cent this year, most of which took place in the past two months, as foreign fund managers pulled out of the country’s bond and equity markets partly due to fears that the Fed would scale down its stimulus package.
The rupiah included by the US-based Morgan Stanley in its “fragile five” currencies most vulnerable to capital outflows on Tuesday fell 0.6 per cent to 11,451 Indonesia rupiah per US dollar, according to prices from local banks compiled by Bloomberg.
The Jakarta Composite Index (JCI), the main price barometer on the Indonesian Stock Exchange, which reached its peak of 5,214 in late May, has lost most of this year’s gains due to foreign fund outflows. The JCI tumbled 0.1 per cent to 4,517.62
Indonesia’s bonds market has suffered the severest impact from the US plan to halt quantitative easing. As of September 16, the yield for the government’s 10-year
benchmark bonds already rose by 284 basis points, the highest among 10 Asian economies tracked by Asian Bonds Online. On Tuesday, yields for the 10-year bonds rose 13 basis points to 8.16 per cent, the biggest increase since September 14.
Currently, foreign ownership in Indonesia’s bonds market now stands at more than 30 percent, among the highest in the region, while the figure for its stock market is 56 per cent.
“Because foreigners account for 30 percent of our bonds market, then if foreign ownership falls to 20 per cent, for example [...] then
our yields will see further correction,” Robert told reporters in his Jakarta office.
Bank Indonesia (BI) Governor Agus Martowardojo expected the Fed to taper its monetary stimulus “carefully” and “smoothly” so that
it would not prompt unwanted volatility in the market in emerging economies.
“Institutional investors understand that it is unlikely for a big country like the US not to be careful in tapering off [its monetary stimulus],” said Agus, who has jacked up the BI rate by a cumulative 150 basis points to 7.25 per cent this year to lure more foreign funds and support the rupiah.
However, some analysts argued that any decision on the Fed tapering was unlikely to have a big impact because global fund managers had priced in the situation, as they already pulled out their money since May, when Fed Governor Ben Bernanke first hinted over tapering the stimulus.
After several weeks marred by uncertainty, it is now “time to go bullish” on Indonesia’s stock market, according to John D. Rachmat, the head of equity research and strategy with state-run Mandiri Sekuritas.
The potential impact of quantitative easing tapering is not as dreadful as feared, said John, who upgraded Indonesia’s country rating to “overweight” from “neutral” and predicted the JCI to return to 5,000 by year’s end.
“While the start of the tapering of quantitative easing may cause some market jitters, we believe this impact will be short lived,” he wrote in a research note released this week.
“Once financial markets realize that there will be no bonds market crash, then the impact of the tapering on market sentiment will diminish in our view.”
Stocks in other Southeast Asian countries ended the day on a high as investors trimmed their exposure to emerging markets before the Fed held its meeting.
The Thai SET index ended a modest 0.09 per cent, while Singapore’s Straits Times Index eased early gains to close unchanged.