Positive Sentiment Buoys Indonesian Stock Market

KOMPAS/RADITYA HELABUMI

A teller at a Jakarta money changer holds up Rp 100,000 notes on Jan. 9, 2019. The rupiah, has shown signs of strengthening over the past week, was valued at 14,120 per US dollar according to Bank Indonesia’s Jakarta Interbank Spot Dollar Rate (Jisdor).

JAKARTA, KOMPAS - The decision of the United States’ Federal Reserve to maintain the benchmark interest rate is expected to increase the flow of global funds into emerging markets. However, direct foreign investment should be increased further.

The Fed’s decision to maintain its benchmark interest rates has brought about positive sentiment toward the Indonesian financial market. The Fed’s decision, along with Bank Indonesia’s (BI) efforts to reduce the current account deficit, have brought a positive impact to the rupiah.

The increase in foreign exchange reserves to US$120.65 billion in December 2018 from $117.21 billion in November 2018 also added to the positive domestic sentiment. According to the Jakarta Interbank Spot Dollar Rate (Jisdor) reference rate, the rupiah rose 40 points to 14,072 on Thursday from 14,112 per US dollar on Wednesday.

However, despite Thursday’s gain, the rupiah exchange rate was still below the 14,031 per dollar recorded on Jan. 8. Since the beginning of 2019, the rupiah has strengthened by 2.7 percent. "The dovish Fed signals are the most dominant factor [causing the rise of the rupiah]. There are also other positive domestic sentiments," Bank UOB Indonesia’s chief economist and researcher, Enrico Tanuwidjaja, said on Thursday.

Dovish and hawkish are common terms in financial markets. Dovish describes a statement by the central bank that it may lower interest rates, while hawkish indicates that a central bank may raise the interest rate.

In addition to holding the benchmark interest rate at 2.25-2.5 percent, Fed chairman Jerome Powell also emphasized that the increase in the benchmark interest rate in 2019 was not too aggressive and any increase would consider global economic conditions.

The World Bank expects the world economy to grow 2.9 percent, while the International Monetary Fund projects global economic growth at 3.7 percent this year. With dovish Fed signals, the Singapore-based UOB Bank revised the projection of the rupiah exchange rate against the US dollar this year to 14,400 per dollar from 14,800 per dollar.

Enrico said the positive domestic sentiment, which helped the rupiah strengthen was, among others, due to BI’s s target to reduce the current account deficit to 2.5 percent of gross domestic product. In the third quarter of 2018, the current account deficit reached $8.846 billion or 3.37 percent of GDP.

In a press conference after the routine meeting of the Financial System Stability Committee (KSSK) on Tuesday, BI Governor Perry Warjiyo said he was optimistic that the rupiah exchange rate would be more stable and strengthen this year, partly due to the Fed\'s decision and global confidence in the Indonesian economy.

Meanwhile, president director of the Indonesia Stock Exchange (IDX), Inarno Djajadi, said the Fed\'s decision to maintain the benchmark interest rates had impacted the country’s capital market positively.

The Jakarta Composite Index (JCI) hit the 6,500 level, the position that was last reached in March 2018. On Thursday, the JCI rose 1.06 percent to close at 6,532.96.

Investment

Enrico estimates global liquidity to rise following the Fed\'s decision on Thursday. This will result in an increase in the flow of global funds into emerging markets, which offer attractive returns, including Indonesia. The inflow of foreign funds will increase the surplus in the balance of payments.

Indonesia\'s quarterly balance of payments in the third quarter of 2018 had suffered a deficit of $4.4 billion. The deficit occurred because the surplus in capital and financial transactions could not cover the current account deficit. In the third quarter of 2018, capital and financial transactions recorded a surplus of $9 million and $4.16 billion, respectively.

However, unlike portfolio investment, direct foreign investment remained stagnant. Based on data from the Investment Coordinating Board (BKPM), the realization of foreign direct investment in 2018 only amounted to Rp 392.7 trillion, an 8.8 percent decline from Rp 430.5 trillion in 2017. "However, it does not mean that investment will not grow. Direct domestic investment will remain important," Enrico said.

Meanwhile, Bank Mandiri’s chief economist, Anton Gunawan, said that one of the obstacles hampering foreign direct investment from entering Indonesia was the high severance payment of employees. However, this problem could be resolved, among others, through cooperation with the Workers Social Security Agency (BPJS Ketenagakerjaan).

Speaking at the DBS Asian Insights Conference 2019 in Jakarta on Thursday, Finance Minister Sri Mulyani Indrawati said the government would further aim to attract foreign investment to support industrialization. The government is exploring the possibility of providing tax incentives in the form of double tax reductions for businesses that provide training and internships, as well as those that conduct research and development.

According to Finance Ministry data, tax reduction incentives have been given to 132 companies with an investment realization of Rp 63.5 trillion.

DBS Bank Ltd’s managing director and group chief economist, Taimur Baig, said Indonesia could take advantage of foreign capital flows to attract foreign direct investment. Indonesia is quite attractive in the eyes of global investors for its improving economic condition, supported by the Fed\'s decision and stable world oil prices.

Meanwhile, Trade Ministry senior adviser Lili Yan said in Jakarta on Thursday night that foreign investment could be increased by taking advantage of existing international economic cooperation agreements.

The large Indonesian market continues to lure investors. "The opportunity to benefit from the relocation of investment from China due to the trade war with the US is still open," she said.

According to professor of economics at the Lee Kuan Yew School of Public Policy, Danny Quah, globalization of trade was like an illusion created by Western countries. Developing countries are made to become dependent on the global trading system. However, when Western countries no longer need it, the system is abandoned (KRN/ LSA/ E18)