Market Update: Why Indonesian Stocks & Rupiah Strengthen on Friday?
After a real roller coaster ride, Indonesia’s benchmark stock index (Jakarta Composite Index) climbed 0.35 percent to 4,446.20 points at the end of the trading week. The majority of key stock indices across the globe tended to strengthen on Friday after a week characterized by severe volatility amid concern about the economic situation in China.
Markets have been plagued by extreme uncertainty as investors remain unsure about the timing of higher US interest rates, while the recent devaluation of China’s yuan triggered concern that growth in the world’s second-largest economy is slowing faster than initially estimated. Further economic slowing in China will impact negatively on global growth as well as on commodity prices while a weaker yuan (Chinese authorities’ attempt to boost the country’s export performance) drags down the value of Asia’s emerging market currencies as these markets need to guard the competitiveness of their export products on the international market. Due to Chinese turmoil, Moody’s cut its economic growth forecast for G20 nations in 2016 from 3.1 percent to 2.8 percent.
However, over the past five trading days markets have somewhat recovered (including global oil prices). Initially, investors were anticipating a Fed Fund Rate hike in September as recent US macroeconomic data was solid. However, after turmoil in China occurred (and spread throughout the world) the Federal Reserve may decide to delay monetary tightening as a further strengthening US dollar would impact negatively on US exports hence negatively affecting the US economy. Earlier this week, the President of the New York branch of the Federal Reserve (William Dudley) stated that a US interest rate hike in September looks “less compelling” due to severe market volatility across the globe and turmoil in China. Vice Fed Chairman Stanley Fisher said the Federal Reserve is still committed to tighten its monetary approach this year but refrained from mentioning a specific month. Although the Dow Jones Industrial Average fell 0.07 percent on Friday, it ended the week 7.4 percent higher than it started.
Japan’s Nikkei 225 Index and China’s Shanghai Composite Index were up 3.03 percent and 4.82 percent, respectively, on improved market sentiments on Friday. However, regarding the full week, both indices were down 1.57 percent (Nikkei) and 3.02 percent (Shanghai).
Strengthening indices in Asia on Friday provided support for Indonesia’s Jakarta Composite Index causing a 0.35 percent rise on the last trading day of the week. However, investors are still very cautious amid current market conditions. During most of the first trading session, the Jakarta Composite Index was up around 1.80 percent but fell prone to selling pressures (profit taking) in the second session. Externally, Indonesian stocks were supported by rebounding oil prices, leading to higher energy shares (particularly coal and gas) across Asia. Internally, the central government’s plan to issue an economic policy package to support the rupiah contributed to positive sentiments. This package includes an increased focus on development of the country’s real sectors in order to balance external sentiment (however, details of this package still need to be released). The Indonesian rupiah appreciated slightly (0.05 percent) to IDR 13,983 per US dollar on Friday according to the Bloomberg Dollar Index. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.83 percent to IDR 14,011 per US dollar on Friday (28/08).
Jakarta Composite Index (IHSG):
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaIndonesia’s central bank tightened rules regarding the purchase of foreign currencies in Indonesia in an effort to support the rupiah. Starting from 25 August 2015 the purchase of at least USD $25,000 worth of foreign currency (per month, per person/company) is required to be accompanied by specific documents in an attempt to thwart speculators who seek to take advantage of the weak and volatile rupiah. Previously, the maximum limit was set at USD $100,000 per month per customer. A stronger rupiah will support other Indonesian assets. Contrary to other markets in emerging Asia, Indonesia is not expected to join a currency war as the country depends on primary material exports and therefore does not really benefit from a weaker rupiah.
Last week Indonesia also issued a new regulation that allows Indonesian listed state-controlled companies to buy back shares (without shareholder approval) in order to curtail excessive market fluctuations. State-Owned Enterprises Minister Rini Soemarno announced that a selection of listed state-owned companies can spend a combined IDR 10 trillion (approx. USD $712 million) for this share buyback program.
Meanwhile, Indonesia’s Financial Services Authority (OJK) said that Indonesian lenders have enough capital to withstand pressure brought about by the ailing rupiah. The OJK said that if the rupiah were to depreciate to IDR 15,000 per US dollar, the situation would still be under control as the capital adequacy ratios (CAR) of Indonesia’s 54 lenders (that are allowed to engage in forex transactions) stand between 10 and 14 percent (above the minimum of eight percent required). These lenders’ net open position in foreign currency stand between 2 and 10 percent (below the 20 percent cap set by the central bank).
Regarding next week, markets are expected to remain volatile as the underlying concerns about a weaker global economic outlook are still present despite mostly rebounding markets over the past days.