Stocks and Rupiah Update Indonesia: A Vicious Downward Spiral?
Both Indonesian stocks and the rupiah continued to slide on Thursday (04/06) and seem to be caught in a vicious downward spiral brought about by both domestic and international factors. Indonesia’s benchmark stock index (Jakarta Composite Index) fell 0.68 percent to close at a five-week low of 5,095.82 points, while the rupiah depreciated 0.39 percent to IDR 13,281 per US dollar (Bloomberg Dollar Index), a level last seen in the late 1990s when the country was plagued by the Asian Financial Crisis.
Market participants seem to have lost quite some confidence in Indonesian stocks since late April 2015 when enough corporate earnings reports of listed Indonesian companies had been published to conclude that most companies had experienced a weak first quarter of 2015. This then immediately led to speculation that Q1-2015 economic growth would be weaker-than-initially-expected and markets reacted by selling Indonesian stocks. Indeed, first quarter GDP growth was only 4.71 percent (y/y), the slowest growth pace in over five years. Apparently President Joko Widodo, who was regarded by most analysts and market players as the right man to put Indonesia’s economic growth back on track (after this growth had been slowing since 2011), has not managed (yet) to reverse Indonesia's economic slowdown. Markets seem particularly disappointed to see few infrastructure development in Indonesia (infrastructure development was one of Widodo's pledges during and after his presidential campaign). However, after only eight months in office we can certainly not expect miracles from Widodo regarding infrastructure projects. Moreover, due to bureaucratic hurdles, the Revised 2015 State Budget (which involves new funds to be allocated to infrastructure spending after the scrapping of most fuel subsidies in January 2015) was only approved by Indonesia’s House of Representatives in February 2015, causing a serious delay in execution. Approval of the Revised 2015 State Budget and Widodo’s commitment to infrastructure development causes cautious optimism that government-led infrastructure development will have a multiplier effect in the economy in the years ahead.
Jakarta Composite Index (IHSG):
In the meantime, however, markets have to face the reality of slowing economic growth in Indonesia as well as sluggish global economic growth (which is to grow in the range of 2.5 percent and 3.5 percent in 2015 depending on the institution you believe). Sluggish global growth, particularly slowing economic expansion in China (one of the key trading partners of Indonesia), is problematic as it has significantly reduced the value of commodities. Indonesia, one of the world’s top commodity exporters, is seriously feeling the impact on its export performance. In April 2015, Indonesian exports contracted 8.5 percent (y/y) to USD $13.1 billion, while the country’s imports fell 22.3 percent (y/y) to USD $12.6 billion in April (imports have now slid for seven consecutive months). Slowing imports and exports inform us that, not only global demand remains sluggish, but also that domestic demand in Indonesia has weakened. Less imports of capital goods and raw materials indicate that investment realization in Indonesia has slowed, while purchasing power has weakened due to the heavily depreciating rupiah exchange rate (since mid-2013 when the US Federal Reserve began to hint at the winding down of the quantitative easing program and caused a bullish US dollar) as well as due to Indonesia’s relatively high interest rate environment (with its key BI rate at 7.50 percent in an effort to combat high inflation, curb the country’s current account deficit and avert capital outflows ahead of looming higher US interest rates before the end of 2015). Given that Indonesia's inflation accelerated to 7.15 percent (y/y) in May 2015, it is highly unlikely that Bank Indonesia will cut its high interest rate environment, meaning that credit expansion and economic activity will be somewhat curbed. The central bank announced to implement other measures to boost the economy (such as reducing down payments for house and car purchases).
One positive point about slowing imports though is that it helps to curtail Indonesia’s wide current account deficit (CAD). The central bank of Indonesia (Bank Indonesia) targets a CAD of about 3 percent of GDP for full-year 2015, roughly the same as last year’s result. However, this level is still unsustainable and seriously undermines investor confidence. As the CAD signals that a country is importing more goods, services and capital than it is exporting (hence relying on foreign inflows which carries medium term dangers) investors quickly pull money out from countries that are plagued by a CAD in times of global economic turmoil. Therefore it would be better to see an improving CAD before the Federal Reserve starts to raise interest rates (a move that is expected to cause capital outflows from emerging markets, particularly those that show financial or fiscal weaknesses).
Back to the international context, Indonesian stocks and rupiah are also feeling the negative impact caused by uncertainty surrounding the Greek debt situation, or, crisis. A Greek exit from the Eurozone would have a severe impact on confidence in the euro as well as on the whole financial system of the Eurozone. Currently, a deal is yet to reach between the Greek government and its Eurozone creditors (that want to see far-reaching reforms in the Greek economy before sending further bailout funds to Greece needed to make a debt repayment to the IMF on 5 June 2015).
The rupiah is also negatively affected because investors speculate that US May Nonfarm Payrolls (to be released on Friday) have improved. Yesterday (03/06), US ADP Nonfarm Employment rose by 201,000 in May, slightly higher-than-expected and brought positive sentiments regarding the US economy. However, other US data are not as positive. For example, the May ISM Non-Manufacturing PMI fell to 55.7 from 57.8 in the preceding month.
Indonesia’s rupiah has been the worst performing emerging Asian currency (among those currencies tracked by Bloomberg) against the US dollar in 2015, depreciating approximately 6 percent so far. This trend continued today. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.35 percent to IDR 13,243 per US dollar on Thursday (04/06). To ease concern, Bank Indonesia stated that it stands ready to intervene in the foreign exchange and bond markets to combat volatility. The yield on the country’s ten-year bonds, which has been increasing since Friday, was 8.325 percent, the highest so far in 2015.