The US Federal Reserve's plan to increase interest rates is a serious threat to the stock and bonds markets of emerging markets, including Indonesia, in 2014. The higher Fed Fund rate will result in a high cost bonds-climate in Indonesia. The Federal Reserve announced on Wednesday (19/03) that it continues to cut its quantitative easing program (QE3) by USD $10 billion in March 2014 as well as aims for an interest rate hike six months after the 'tapering' has ended. With the current pace, QE3 is expected to end in December 2014.
With the further ending of QE3 and an US interest rate hike in the first quarter of 2015, emerging markets will again feel the impact as global funds will return back to the USA. On Thursday (20/03), one day after the Fed's announcement, the Jakarta Composite Index (IHSG) plunged 2.54 percent and the Indonesian rupiah fell 0.84 percent against the US dollar.
Despite recent restored confidence in Indonesia's financial fundamentals (due to the easing current account deficit and inflation as well as sharp rupiah appreciation), the country was one of the hardest hit emerging economies on Thursday as international investors engaged in profit taking after Indonesia's index had risen considerably due to the announcement of Joko Widodo that he will run for president in the 2014 elections.
This year, Indonesia needs IDR 300 trillion (USD $26.5 billion) from the bond-market in order to finance the 2014 State Budget (APBN 2014). About 30 percent of this amount is expected to originate from foreign investors. With rising US interest rates, Indonesia needs to make its government bonds more attractive for these investors by raising the coupon. When the coupon on government bonds are raised, it will be followed by higher coupons of corporate bonds, resulting in a high-cost bond market. Up to March, there have been no corporate bonds issuances as companies prefer to wait and see for the 2014 legislative and presidential elections (scheduled for April and July) and the further winding down of the US quantitative easing program.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.21 percent on Friday (21/03) to IDR 11,431 per US dollar. Compared to the start of the week, the rupiah fell 1.41 percent.