Wednesday, June 12, 2013

From Indonesia with the Sliding Rupiah and the Declining Stocks Market

courtesy abcgoodwallpaper.blogspot.com
- Recent global sell-off in stock markets has brought the Indonesian Stock Exchange (IDX) to decline further, down 3.5% on Tuesday, June 11, the worst drop in one day since June last year before it recovered today by almost 2%  at 4.697,884. 

- According to the data, foreign investors have been net sellers on the IDX for 12 consecutive days with a staggering Rp 3.98 trillion of net sales on Tuesday. 

That day, the rupiah continued its plunge, going as low as 10,111 per dollar in midday trading, before closing at 9,828, according to Bloomberg. Reuters quoted the currency as low as 10,117. Today the local currency has started to strengthen to above the psychological level of 10,000 a dollar.

 - Facing the latest deteriorating conditions, below are comments from the authorities:

 From the central bank:

The bank governor Agus Martowardojo said today that the declining of the rupiah was temporary. 

The reasons behind the weakening, he said, partly lied on the facts that there were fears in the market due to the Federal Reserve plan to reduce its bond-buying program. From the domestic side, he added, the uncertainties over when the government will start raising fuel price has triggered investors to pull out their money in the rupiah assets.

Agus acknowledged that there was a tight rupiah liquidity in the domestic market. Handling this matter, he highlighted the central bank stands ready to provide the needs.

Further, to manage current conditions, Bank Indonesia claimed it has three prescriptions.  As outlined today by the deputy governor Perry Warjiyo, those are: 

a. The central bank will supply large amount of dollar to the market in order to stabilize the rupiah. "We want to ensure there is ample dollar liquidity," he said.

b. The central bank will buy the Indonesian government bonds from the secondary market. "The bonds we purchase are coming from the one that sold by foreign investors. We stand ready to buy whatever amount they sell."

 c. The central bank decided to raise the lower corridor of interbank money market, known locally as Fasbi, rate by 25 bps to become 4.25%. "It  takes effective starting from today, June 12."

- The decision to adjust Fasbi came as a surprise as it released the day before the decision on the benchmark interest rate, BI rate, due tomorrow. Currently, the BI rate was at record low 5.75%.

- Fasbi is the yield the central bank pays for commercial banks on funds they deposit at the central bank. The magnitude in changing this rate is less than the impact of an adjustment in the BI rate.

 From the Coverment:

Deputy finance minister Mahendra Siregar said today the rupiah has been affected by global uncertainties, particularly due to possible tapering policy in the US. In addition, he also noted that deficit current account, which on April reached $1.62 billion,  has contributed to the slide as well.

"We will continue to closely watch the conditions. Indeed, any reduction or even termination of quantitative easing would spark capital outflows in emerging markets, including our market ."

He emphasized the government was anticipating possible pullback or sudden reversal in the market, which apparently has started to happen in the emerging markets, including Indonesia.

"How we do the anticipation? It's by putting our focus on maintaining continued structural reformation and keeping our fundamental economy from unnecessary distraction such as not letting our budget consumes by huge subsidy for fuel."

He believed as long as the country remains committed in doing the aforementioned home works, then, "At the end of the day, we will continue to see Indonesia as an investment destination both in terms of direct or portfolio capital."


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