Indonesian Rupiah and Stocks Update: Profit Taking Causes Falling Index
The benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) declined 0.92 percent to 5,136.86 points on the last trading day of the week. Seven of the ten sectorial indices fell, led by the finance sector (-1.66 percent), followed by consumer goods (-1.50 percent) and manufacturing (-1.34 percent). The main reason for this poor performance is that investors are again looking at the true fundamentals of the Indonesian economy instead of optimism about Joko Widodo becoming Indonesia’s seventh president.
This made the investor community decide to engage in profit taking. One of the biggest problems in the Indonesian economy is the country’s structural current account deficit. Although the central bank of Indonesia (Bank Indonesia) said that it expects to see a slight trade surplus in July 2014, the market expects to see another deficit. At the start of September, Statistics Indonesia will publish the official trade data for July (as well August inflation). Indonesia’s current account deficit widened to USD $9.1 billion, or, 4.27 percent of the country's gross domestic product (GDP) in the second quarter of 2014. This widening was much larger than forecasted by analysts and also meant a sharp widening from (a revised) 2.05 percent of GDP deficit recorded in the previous quarter. Generally, a current account deficit below the three percent of GDP mark is considered as sustainable.
A number of blue chips took a dive on Friday (29/08). For example Bank Central Asia (-5.5 percent), Unilever Indonesia (-3.4 percent), Bank Mandiri (-1.4 percent), Kalbe Farma (-1.2 percent) and Gudang Garam (-1.1 percent).
Around 6.1 billion shares, valued at IDR 5.8 trillion (USD $496 million), were traded on the Indonesia Stock Exchange (IDX) today with foreign investors accounting for 47 percent of total trading activity. However, they recorded net selling of IDR 750 billion.
Meanwhile, the Indonesian rupiah exchange rate appreciated 0.09 percent to IDR 11,690 per US dollar on Friday (29/08) according to the Bloomberg Dollar Index. However, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.29 percent to IDR 11,717 per US dollar. Although the rupiah is currently feeling the pressure from the current account deficit, the currency has good potential to strengthen once the new Joko Widodo-led government starts various reforms, for example tackling the generous fuel subsidies.
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