Indonesian stocks hit a record high on Thursday (22/01). Most emerging Asian stocks and currencies strengthened on increased speculation that the European Central Bank (ECB) is to launch a massive bond-buying program (which was confirmed later on the day after Asian markets had closed), a move aimed at boosting inflation in the Eurozone and which puts pressure on euro-denominated assets. The euro had depreciated 1.67 percent against the US dollar by 11:20 ET on Thursday based on Bloomberg data.
Asian stocks and currencies gained on European and Chinese stimulus to boost their economies. The European Central Bank (ECB) announced today that it kept its key interest rate unchanged at 0.05 percent and launched a massive monthly 60 billion euro (USD $70 billion) private and public bond-buying program (quantitative easing) until September 2016 in an effort to boost the sluggish economic situation in the Eurozone.
Meanwhile, authorities in China used open-market operations to pump funds into the financial system for the first time in a year. On Wednesday (21/01), the country’s central bank (PBOC) said it issued an additional ¥50 billion worth of 3-month loans to mid- and small-sized banks while rolling over ¥269.5 billion of similar loans that have expired, in an attempt to boost the economy which had slowed to 7.4 percent (y/y) in 2014.
Indonesian Economic Minister Sofyan Djalil said that the quantitative easing program in Europe may be able to somewhat offset the negative impact caused by monetary tightening in the United States as Europe’s QE program increases global liquidity. The US Federal Reserve, which scrapped its QE program last year, is expected to raise its key interest rate around halfway through 2015, a move which is expected to lead to capital outflows from emerging economies including Indonesia. Funds originating from the Eurozone are expected to find their way to emerging markets due to attractive yields.
Indonesia’s benchmark stock index (Jakarta Composite Index) climbed 0.73 percent to 5,253.18 points on Thursday (22/01). However, foreign investors recorded net selling (IDR 249 billion) on today’s trading day, bringing total foreign net sales to IDR 2 trillion so far in 2015.
Only shares of Indonesia’s agriculture and trade sectors fell on Thursday. Construction and property shares rose sharply due to the lower price of cement. Last week, Indonesian President Joko Widodo instructed state-owned cement producers to cut cement prices by around IDR 3,000 per sack in a move to boost cement by enabling the wider public to purchase cement (cement consumption, as well as car sales, is one of the key indicators that inform about the state of the economy). As a result of lower cement prices, Indonesian property and construction stocks gained.
Indonesia Rupiah Exchange Rate
Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.84 percent to IDR 12,451 per US dollar on Thursday (22/01).| Source: Bank Indonesia
However, Agus Martowardojo, Governor of Indonesia’s central bank (Bank Indonesia), expects that the rupiah will depreciate further in the remainder of 2015 amid high volatility, global uncertainty and bullish US dollar momentum ahead of higher US interest rates. Indonesian Finance Minister Bambang Brodjonegoro agreed with the central bank Governor.
Indonesian stocks and the rupiah exchange rate are also supported by domestic politics. Endorsement of Indonesia’s House of Representatives to reinstate direct regional elections improved political stability in Southeast Asia’s largest economy. Previously (in September 2014), the political parties that opposed Indonesian President Joko Widodo passed a law that would abolish these elections thus leaving it to regional legislatures to elect mayors, district heads and governors. It was feared that this would open up room for corruption in Indonesia’s local elections. After the passing of the law in September 2014, former President Susilo Bambang Yudhoyono immediately issued a presidential decree to override parliament’s approval. The House’s decision on Tuesday (20/01) to reinstate direct regional elections signals improved political stability and also increases speculation that the House will approve the draft of the Indonesian government’s revised 2015 state budget. Due to the significant cut in fuel subsidies this budget gives fiscal room of up to IDR 155 trillion ($12 billion) for increased spending on the country’s infrastructure, welfare and the maritime sector.
Investors’ confidence in Indonesia’s financial fundamentals was evidenced by a bond auction on Tuesday (20/01). In this auction Indonesia sold IDR 17.3 trillion (USD $1.4 billion) worth of conventional bonds, well above an indicative target of IDR 12 trillion. The bonds had lower yields than the country’s previous bond auction (6 January 2015).