Positive Sentiment Not There Yet

ANTARA FOTO/SIGID KURNIAWAN

Bank Indonesia (BI) Governor Perry Warjiyo (center), together with Senior Deputy Governor Mirza Adityaswara (second left), Deputy Governor Sugeng (left), Erwin Rijanto (second right) and Rosmaya Hadi, prepare to disclose the results of the Board of Governors Meeting at BI\'s headquarters in Jakarta on Wednesday (15/8/2018).

JAKARTA, KOMPAS – The policies of Bank Indonesia and the government have not been able to bring a positive sentiment to the market. The rupiah hovered at around Rp 14,900 per US dollar in the past three days, indicating that external factors affected the domestic financial market.

Based on the Jakarta Interbank Spot Dollar Rate (JISDOR), on Friday (28/9/2018), the rupiah was at Rp 14,929 per US dollar. On the market, the rupiah was sold at 14,895 to Rp 14,945 per US dollar. It weakened on Thursday (27/9) at Rp 14,919 per US dollar.

On Wednesday, Bank Indonesia (BI) raised the BI interest rate 25 basis points to 5.75 percent. BI will also adopt domestic non-deliverable forwards or hedged transactions in the future in the domestic foreign currency market.

Previously, the government issued a policy to control imports, applying a rule that mandates the use of 20 percent biodiesel, while trying to increase exports. The BI and government policies aim to lower the current account deficit in the second quarter of 2018 at 3.04 percent from the gross domestic product.

An economist with the Institute for Development of Economics and Finance (Indef), Bhima Yudhistira Adhinegara, told Kompas the BI interest rate hike at 25 bps had been predicted. Because there was no surprise, the market responded normally.

The lack of a positive sentiment was the result of external factors that came not only from the US but also from Italy. The Italian government and parliament have not agreed on a budget, consequently triggering uncertainty in Europe.

“Another factor is the global oil price, which is now $81 per barrel. It is estimated to reach $90 to $95 at the end of this year,” Bhima said.

For a country like Indonesia, which imports crude oil to supply domestic fuel consumption, Bhima said, the negative impact from the oil price hike was greater. Due to this, the trade deficit will widen.

The US dollar demand for oil supply will increase so the foreign currency pressure will strengthen.

The trend for foreign investors to enter Indonesia’s bond market has improved even though the coupon from sovereign bonds declined from 8.37 to 8.35 percent. “Those steps should be supported with an increase of the foreign exchange reserve through service exports, especially by having no income tax (PPh) on service exports. Currently, there are only three sectors with zero income tax, namely maklon, maintenance and repair and construction, while the others are still at 10 percent,” he said.

PT Bank Central Asia economist David Sumual said external factors still affected the market sentiment. The hike of the BI benchmark interest rate was expected to curb capital outflow from Indonesia’s financial market as well as attract foreign investors into the domestic bond market.

The combination of the BI and government policies is expected to reduce the current account deficit to less than 2.5 percent of the gross domestic product by the end of 2018.

KOMPAS/PRIYOMBODO

A shop assistant inspects a laptop sold at an outlet in the Ambassador shopping center, Jakarta, Friday (28/9/2018). The weakening of the rupiah against the US dollar has led to an increase in the selling prices of laptops. Sellers said the weakening rupiah has not significantly affected sales, despite making imported electronic products more costly.

Weakening

Property investment is predicted to weaken simultaneously with the BI benchmark interest rate hike to 5.75 percent. Real Estate Indonesia (REI) chairman Soelaeman Soemawinata said the hike in the benchmark rate would impact the real sector, including property. The BI benchmark interest rate will increase the term deposit interest rate and credit interest rate. This will drive investors to deposit at banks rather invest in property.

On the flip side, developers will have opportunities considering the demand for housing in the middle-lower market segment, with Rp 200 million to Rp 600 million per unit.

Separately, PT Bumi Serpong Damai director Hermawan Wijaya said the benchmark interest rate hike was necessary to cushion the volatility of the rupiah against the US dollar. The BI interest rate will affect the property business. However, developers have prepared some steps to anticipate a weakening property market.

The BI benchmark rate will also impact small and medium business players that produce automotive parts.

Association of Small and Medium Automotive Component Companies (Pikko) chairwoman Rosalina Faried said the small and medium enterprises would attempt to reduce production costs, including by seeking alternative raw materials to substitute imports.

Momentum

Coordinating Economic Minister Darmin Nasution said the BI benchmark interest rate hike to 5.75 percent would affect momentum in economic growth. Growth in credit channeling and consumption will potentially slow down due to market liquidity tightening. However, the conditions will be balanced with the government plan for tax incentives to drive investment.

“How big the impact the BI interest rate hike will be depends on the government’s ability to push from the other sector, such as with tax incentives,” Darmin said in Jakarta.

Thus, the government is now evaluating the option of adding tax incentives.

(HEN/LKT/CAS/KRN)