Emerging economies, such as Indonesia, have been highly impacted by the Fed's quantitative easing program as a significant portion of the money flowed to lucrative assets in emerging markets. However, when in May 2013 the Fed started to speculate about an ending of QE3, a shock went through global stock markets. US dollars were pulled out of emerging markets thus putting pressure on currencies and stock indices of emerging markets.

Among emerging markets, Indonesia in particular was hit hard by the global panic that followed because the country has a number of internal problems. Investors are concerned about Indonesia's current account deficit (which stood at USD $9.8 billion in the second quarter of 2013, and which is particularly caused by a trade deficit in the country's oil and gas sector). Moreover, higher inflation emerged after prices of subsidized fuel had been raised in late-June 2013 (inflation reached 8.79 percent year-on-year in August). All these issues combined resulted in Indonesia's sharply depreciating rupiah (against the US dollar). Based on the central bank's mid rate, the rupiah weakened more than 18 percent since the start of this year.

| Source: Bank Indonesia

For Indonesia, the pinnacle of foreign capital outflow happened in June 2013 when over IDR 20 trillion (USD $1.77 billion) was pulled out of the Indonesian stock market. In the same month, a similar amount was pulled out of government bonds (SBNs). The next two months, July and August, were also coloured by foreign capital outflows from the stock market, albeit much less than in June. The bond market, however, showed limited recovery.

Month    Foreign Net Stock Buying/
(Selling) on IDX (in IDR billion)
Foreign Holdings of SBN Bonds
             (in IDR trillion)
January                  5,695.44                     273.20
February                 11,242.20                     281.63
March                  1,827.96                      280.75
April                   722.06                     298.72
May                  (355.84)                     302.94
June                (20,131.80)                     282.96
July                 (2,178.75)                     285.77
August                 (5,698.18)                     284.01
September                  1,776.11¹                     285.60²
Total                 (7,100.80)                          -

¹ up to 17 September 2013
² on 13 September 2013
Source: Indonesia Stock Exchange (IDX) & Finance Ministry

In September, after four consecutive months of net selling, foreign investors started to return to the Indonesian stock market. Up to 17 September, foreigners recorded a net purchase amounting to IDR 1.78 trillion (USD $157.5 million) worth of Indonesian stocks. As such, foreign investors seem somewhat recovered from the initial shock that went through global markets since May as they seem to realize that a sudden stop to QE3 is not likely (and recent concerns about an US military action in Syria have also been diminished).

But what if the Fed does not reduce its stimulus program? After all, the US unemployment rate has not met the Fed's target yet (the figure stood at 7.3 percent in August). This scenario seems highly unlikely as it will result in enormous volatility on global financial markets and will thus jeopardize the recent initial steps to economic recovery in the US. The market expects a scaling down of about USD $10 to $20 billion. Less or more than that range is expected to result in high volatility.

The outcome of the FOMC meeting will be announced later today (18/09). Therefore, investors in Indonesia's capital markets will be able to react to the outcome on tomorrow's trading day.