Most stock markets and currencies in Southeast Asia weakened on Friday (29/05), including Indonesia’s benchmark Jakarta Composite Index and the rupiah. The Jakarta Composite Index fell 0.40 percent to 5,216.38 points, while the rupiah depreciated 0.01 percent to IDR 13,224 per US dollar according to the Bloomberg Dollar Index. Over the past week, Indonesian stocks and the rupiah weakened primarily due to the Greek debt crisis, looming higher US interest rates and the lack of positive domestic factors.
Greece needs to make a debt payment to the International Monetary Fund (IMF) on 5 June 2015. However, in order to make the payment the country needs to receive bailout funds from its Eurozone creditors. Greek authorities are optimistic that an agreement with its lenders can be settled by Sunday (31/05). However, the country's Eurozone creditors want to see structural reforms before sending any bailout funds. As such, a Greek exit from the euro (Grexit) is still a possibility and highly feared by investors as it would jeopardize the stability of the euro and the whole financial system of the Eurozone.
The second factor that explains why most emerging market stocks and currencies weakened over the past five trading days is the looming US interest rate hike. Federal Reserve Chief Janet Yellen emphasized on Friday (22/05) that the benchmark Fed Fund Rate is to be hiked before the end of 2015 provided that US economic data remain positive, hence resulting in capital outflows from emerging markets including Indonesia. Moreover, the minutes of the Federal Reserve’s latest two-day policy meeting (FOMC), signal that most Federal Reserve officials are in favour of higher US interest rates in 2015. Analysts now believe that September may be the correct timing for such a rate hike.
Jakarta Composite Index (IHSG):
Market participants in Indonesia are believed to be waiting for May’s inflation figure, which will be released at the start of June. In April, Indonesian inflation accelerated to 6.79 percent (y/y) mainly as a result of higher transportation tariffs. Moreover, ahead and during the Ramadan (which is the Islamic holy fasting month and starts in June) as well as subsequent Idul Fitri celebrations, inflation always peaks. Obviously, investors are hoping to see an improvement in the inflation figure. High inflation and the wide current account deficit were reasons for Indonesia’s central bank (Bank Indonesia) to keep the country’s benchmark interest rate at 7.50 percent in its May Board of Governor’s Meeting. Indonesia’s May inflation is expected to be better than the 0.36 percent (m/m) recorded in April.
However, after markets had closed on Friday (29/05), it was released that the US economy had contracted 0.7 percent (y/y) in Q1-2015 as American consumers remained cautious, the strong dollar negatively affected the country's trade balance, and the cold winter had a severe negative impact on transportation and construction. This figure was a revision of the earlier announced 0.2 percent GDP growth figure. For sure, sluggish growth - what’s more contraction - will raise questions about whether the timing is ripe for a US interest rate hike in 2015. After all, it is better to raise these interest rates too late than too soon. This means that we may see capital inflows into Indonesia in the week ahead, provided that Indonesia’s May inflation is indeed controlled.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.04 percent to IDR 13,211 per US dollar on Friday (29/05).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia