Failure to Attract Ratings Upgrade Could Inhibit Rupiah
Over the last few months, we have seen a good deal of stability in the financial markets. This has been the experience in most asset classes, and the global value of the Indonesian rupiah is giving investors an idea of how the IDR is likely to continue to perform as an emerging market asset.
Bank Indonesia is arguably the most critical entirety when determining where emerging markets stand in terms of monetary policy changes. In recent months, Indonesia has been embarking on economic reforms -- boosting the country’s growth to nearly 5%. Nonetheless, the country’s hopes of improving its S&P credit rating have fallen short and regional investors are questioning whether the country needs to do more in terms of ensuring growth and consumer price stability.
Indonesia Finance Minister Bambang Brodjonegoro made comments in May suggesting that the country was hopeful S&P will lift the country’s sovereign credit rating. Indonesia is currently in the BB+ bracket, which is the highest junk grade by the credit rating agency. Many investors have argued that this is inhibiting the rupiah in making consistent gains against the rest of the market.
In reference to the S&P, Brodjonegoro told reporters in May, “In general they are satisfied and excited about the commitment of the reforms from the president and the government.”
This had aided the country in embarking on a number of economic reforms in recent quarters, even considering an unprecedented tax amnesty bill. The efforts have been largely positive as the economy did grow by 4.92% in the first fiscal quarter of the year, falling slightly below the expected 5.3% for the year.
S&P Maintains its Rating
But at the start of June, S&P announced it wouldn’t be lifting the country out of the junk basket. The agency cited concerns over budget deficits, which are forecast to increase in the coming years, and corporate credit quality.
“Indonesia has done a bit more than in previous years to strengthen its fiscal position but S&P may prefer to see a structural shift in its fiscal position,” CIMB Banking economist Song Seng Wun told Bloomberg.
The Impact of an Improved Rating
If S&P had upgraded Indonesia’s sovereign rating, the country would have moved to a full investment-grade status. This would have boosted the country’s bond and currency markets, as more funds would have been able to invest in the economy.
Indonesia is currently Southeast Asia’s largest economy, with Asia’s best performing bond market. Moody’s and Fitch already rank the country with an investment grade status. S&P is considered the most conservative of the three credit rating agencies and therefore the decision to maintain the rates didn’t shock market experts. But this has most assuredly affected the performance of regional assets -- in particular, the Indonesian rupiah.
Chart View: USD/IDR
First, it is important to understand how markets are valuing the currency and then we can start to surmise which price levels are most appropriate for long-term investors. In the chart below, we can see a daily price history in the Indonesian rupiah. When we are dealing with the price activity in the USD/IDR technical outlook, we can see that key resistance can now be found at 14093.6.
Before this can be overcome, we are likely to see some degree of increased market activity on any approach of minor resistance at 13807.2. Support below can be found at 13423.7. This creates a somewhat murky trading picture that favors a trading stance that is characterized by traders staying on the sideline and waiting for better opportunities that are clearer in nature.
Chart activity shows that the long-term uptrend is gaining momentum again. With the clear break of the key resistance at 14093.6, markets have confirmed the bullish continuation of the prior uptrend and a completion of the a-b-c corrective wave. Before challenging major resistance, bullish traders will first need to clear a minor resistance level at 13807.2. However, there are still arguments to be made for the other side of the market and most traders will likely look for selling opportunities if the market breaks the support level at 13423.7. A decisive break of support levels here will most likely bring the sellers back in action.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.