External factors, including global economic uncertainties, will add to the pressure on the Indonesian economy. Despite strong domestic economic fundamentals, it will be difficult to drive economic growth this year.
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ANTARA FOTO/WAHYU PUTRO A
A teller counts US dollars at the head office of Bank Mandiri, Thursday (28/6/2018). Bank Indonesia’s Jakarta Interbank Spot Dollar Rate (Jisdor) showed the rupiah weakening to Rp 14.271 per US dollar, the lowest level in more than three years, amid negative market sentiment and unsupportive fundamentals.
JAKARTA, KOMPAS – External factors, including global economic uncertainties, will add to the pressure on the Indonesian economy. Despite strong domestic economic fundamentals, it will be difficult to drive economic growth this year.
External factors include the escalating US-China trade war, the expected decline in China\'s economic growth to 6.5 percent this year, trade barriers imposed by India and the European Union, and the rise in world crude prices.
The impacts of these external and other factors are reflected in the further drop in the rupiah exchange rate against the US dollar and the fall in the Jakarta Composite Index (JCI), the price barometer for the Indonesian Stock Exchange (IDX).
According to the Jakarta Interbank Spot Dollar Rate (JISDOR), the rupiah weakened further to Rp 14,271 to the dollar on Thursday, the lowest since Oct. 7, 2015. On Oct. 6, 2015, the rupiah plunged to Rp 14,382 to the dollar.
Meanwhile, the JCI slumped by 2.07 percent, or 120.233 points, to 5,667.319 at the close of trading. The JCI has plummeted by 10.83 percent since the beginning of the year and is now further from the 6,000 level. At the close of trading at the beginning of this year, JCI reached 6,339.23.
Muhammad Faisal, director of the Center for Reform on Economics (CORE), told Reuters on Monday that rising world crude prices, trade barriers and uncertainties over commodity prices had caused Indonesia to suffer a trade deficit.
The rise in the US Federal Reserve’s benchmark interest rate had prompted Bank Indonesia (BI) to also raise its benchmark interest rate, which could in turn push up lending rates. If the lending rates rise, the industrial sector will have to carry more weight in boosting the domestic economy.
From that indicator alone, Indonesia was facing more difficulties in spurring economic growth.
"Late last year, CORE estimated that Indonesia\'s economy would grow from 5.1 to 5.2 percent. However, given the rising world crude oil prices and the escalation of the US-China trade war, Indonesia\'s economic growth this year is estimated only at 5.1 percent," Faisal said.
By May, Indonesia\'s trade deficit had reached US$2.83 billion, while the country’s current account balance – the broadest measure of the country\'s international trade – suffered a deficit of $5.5 billion, equivalent to 2.15 percent of the gross domestic product (GDP).
Chief economist Winang Budoyo at Bank Tabungan Negara said the central bank would have to prioritize the rupiah’s stability rather than economic growth. To that end, BI is predicted to raise its reference rate (7-Day Reverse Repo Rate/7DRRR) by another 25 basis points (bps) at its Board of Governors meeting on Friday.
BI senior deputy governor Mirza Adityaswara said the policy of the Chinese central bank to weaken the renminbi in an effort to reduce the impact of its trade war with the US had also contributed to the fall in developing countries’ currencies. In addition to the renminbi depreciation, the financial market was also affected by the further rise in world crude prices.
According to Bloomberg, the WTI and Brent crude oil prices increased respectively to $73.78 per barrel and $77.88 per barrel on Thursday.
"Of course this affects Indonesia, because the country is an oil importer," said Mirza.
He assured that BI would maintain its presence in the market to stabilize the rupiah exchange rate and government bond prices. At the end of May, Indonesia\'s foreign exchange reserves totaled $122.91 billion.
ANTARA FOTO/WAHYU PUTRO A
A teller counts US dollars at the head office of Bank Mandiri, Thursday (28/6/2018). Bank Indonesia’s Jakarta Interbank Spot Dollar Rate (Jisdor) showed the rupiah weakening to Rp 14.271 per US dollar, the lowest level in more than three years, amid negative market sentiment and unsupportive fundamentals.
Overrated
Investors went on a selling spree on Thursday in anticipation of the BI rate hike. The panic selling was deemed an overreaction, as the 25 bps increase in the BI rate would not affect the performances of publicly listed companies.
On Thursday, foreign investors sold Rp 3.61 trillion in shares and bought Rp 2.919 trillion, resulting in net sales of Rp 691.76 billion. Foreign investors’ net sales have reached Rp 49.786 trillion since the beginning of the year.
The research and analysis vice president at Valbury Asia Securities, Nico Omer Jonckheere, said the selling pressure from foreign investors had contributed to the fall of the JCI.
"Capital market investors have a tendency to react before any policy is announced. However, for the present, I view the way investors have responded to the planned BI rate hike as an overreaction," he said.
Nico is optimistic that the current situation would not last long. He expected that market conditions would return to normal after BI raised its interest rate.
"Indonesia\'s macroeconomic conditions are still very promising. Moreover, political stability has been maintained well, as seen in the regional elections that proceeded smoothly, which did not cause any negative sentiment on the stock market," said Nico.
The head of research at Koneksi Kapital, Alfred Nainggolan, said the JCI fell because investors believed the central bank would raise the interest rate. "BI has also intervened, either by selling dollars or buying local bonds on the secondary market to support the rupiah. However, the negative sentiment resulting from the trade war between the US and China is too strong," he said.
