Indonesian Stocks & Rupiah Update: Impact of ECB Quantitative Easing

Despite the fact that the market had already been speculating on the introduction of quantitative easing in the Eurozone, there was still a significant post-announcement rally visible, possibly caused by the extent of the ECB’s bond-buying program (a more-than-anticipated 60 million euro per month to purchase assets including government bonds, debt securities issued by European institutions and private-sector bonds). Moreover, investors were pleased to learn that the central bank of the Eurozone will provide stimulus until its inflation target of 2 percent (y/y) has been achieved. This means that, despite the fact that ECB President Mario Draghi mentioned September 2016 as the suggested closing time, the program may continue afterwards provided that the ECB’s inflation target has not been achieved yet.

Besides boosting inflation, quantitative easing reduces bond yields (although these are already negative in the Eurozone) and provides great depreciating pressures on the euro currency. The euro has fallen to a spectacular 11-year low of 1.12 against the US dollar on Friday (23/01) based on the Bloomberg Index. The euro lost 1.43 percent in value on Friday against the US Greenback after the ECB program was officially announced. A weak euro causes imported inflation and should make the region’s export products more competitive.

The ECB also decided to leave its interest rates unchanged. The key lending rate is 0.05 percent, while the overnight lending facility is minus 0.2 percent (meaning that banks are required to pay a fee to deposit their surplus funds at the central bank).

For the benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) the news from Europe was a major cause for optimism. Due to increased global liquidity, funds, originating from the Eurozone, are expected to reach emerging markets including Indonesia (similar to the large capital inflows that occurred as a result of the US Federal Reserve’s quantitative easing program). And therefore, net foreign buying at the IHSG returned. On Friday (23/01) foreigners - making up 38 percent of total trading on the exchange - recorded net buying worth IDR 1.61 trillion (USD $130 million). As usual, foreigners particularly seek Indonesia’s blue chip stocks which include Astra International (+4.3 percent), Bank Rakyat Indonesia (+3.5 percent) and Bank Mandiri (+3.4 percent).

Jakarta Composite Index (IHSG):

Apart from these external factors, there are also positive sentiments stemming from the domestic political and economic arena. The President Joko Widodo-led government has shown its commitment to implement structural reforms (by basically scrapping low-octane gasoline subsidies and introducing a fixed IDR 1,000 per liter subsidy for diesel) in order to boost structural economic and social development. In the revised 2015 State Budget (which still needs parliament’s approval) the government added significant funds, available due to the fuel subsidy cuts, for the development of the country’s maritime, infrastructure and transportation sectors. This revised budget also includes an economic growth target of 5.8 percent (y/y) in 2015, which would be a significant jump from the estimated 5.1 percent GDP growth rate in 2014. Investors are currently also less concerned about parliament’s opposition to President Widodo. Before assuming office in October 2014, the Merah-Putih coalition (referring to those political parties that supported defeated presidential candidate Prabowo Subianto in the presidential election) was expected to block all of Widodo’s reform plans out of spite. This triggered major concerns particularly as the Merah-Putih coalition formed a majority in parliament, while Widodo can only rely on a minority coalition. However, last week we saw Indonesian parliament agreeing to reinstate direct regional elections. Whereas, in September last year, the Merah-Putih coalition managed to pass a bill to abandon direct regional elections (which by many, including Widodo, was regarded as a setback for democracy), it now agreed to reinstate these direct elections. This seriously diminishes concerns about a political deadlock and causes expectation that the revised 2015 State Budget will be approved as well.

However, there is one cloud on the horizon. On Friday (23/01) Indonesia’s criminal investigation unit arrested a board member of the Corruption Eradication Commission (KPK), Indonesia’s anti-graft body. The KPK’s Deputy Chairman Bambang Widjojanto was arrested on allegations that he provided a false testimony in a 2010 court case (before he joined the KPK). However, speculation emerged that this arrest was actually an act of revenge by the Police Force. Less than two weeks ago, the KPK named General Budi Gunawan (who was chosen by Widodo to become the country’s new Police Chief) as a suspect in a bribery case. These issues raised concerns about a possibly out-of-control rivalry between the KPK and the police force hence igniting some political uncertainty.

Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.06 percent to IDR 12,444 per US dollar on Friday (22/01). Reza Priyambada, Head of Research at Woori Korindo Securities Indonesia, said that - besides the positive effect of the ECB’s move to announce quantitative easing - Indonesia’s currency is strengthened by market participants’ confidence in good Chinese manufacturing activity data.

Rupiah versus US Dollar:

| Source: Bank Indonesia

The latest data from the Finance Ministry show that foreign funds have pumped IDR 5.73 trillion (roughly USD $460 million) into Indonesian rupiah-denominated sovereign notes in the first three days of the week, evidencing foreign investors’ confidence in Indonesia’s economic fundamentals.

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