Indonesia's benchmark Jakarta Composite Index rose 0.52 percent to 5,110.18 points on Friday (15/07) or 1.77 percent over the past week. In fact, Bloomberg reported that the combined value of companies traded on Indonesia's index (USD $416 billion) has now overtaken the value of those in the markets of Malaysia and Thailand, hence Indonesia can be labelled the biggest emerging market in Southeast Asia. Malaysia held this position over the past three years but due to the tumbling oil price it lost quite some of its value (Malaysia being a net oil exporter). So far this year, net foreign inflows into Indonesian stocks have reached the amount of IDR 18 trillion (approx. USD $1.4 billion), a good performance, especially compared to the IDR 22 trillion worth of net selling that was recorded in 2015.

The performance of the Jakarta Composite Index has been strong in line with global markets. Ever since the release of positive US jobs data on Friday (08/07) markets have been bullish, worldwide, and left behind Brexit-inflicted negativity (moreover the inauguration of Theresa May as Britain's new prime minister past Wednesday provided a higher degree of perceived political certainty and stability in the United Kingdom). The June US jobs report signaled that the US economy is in a relatively healthy state (but not "healthy enough" to trigger renewed expectation of another US interest rate hike).

The recent rally is also fueled by expectation of more stimulus from key central banks across the globe (European Central Bank and the Bank of Japan in particularly). Japanese shares led gains in Asia over the past week (while the yen fell the most since 1999) after Japanese Prime Minister Shinzo Abe won the upper-house election. This provides him a new mandate to boost the economy.

Various economic data from China boosted positivity. China's Q2-2016 GDP growth pace at 6.7 percent (y/y), June factory output, retail sales as well as new lending also beat estimates and forecasts. These are all signs that the economy of China - the world's second-largest economy - is stabilizing, hence boosting risk sentiment across the globe.

Meanwhile, oil prices experienced a volatile week, responding to the near-eight percent decline in the preceding week and the bearish US oil inventory report. Overall, the Brent and West Texas Intermediate price rose by two and one percent, respectively, over the past week, supported by good US retail sales data and China's 6.7 percent (y/y) economic growth in Q2-2016. However, concern about a global glut in crude and refined products remains.

Despite being small, the limited gain in crude oil prices over the past week is a positive matter for Indonesia. Crude oil usually sets the trend for other commodity prices. Indonesia is one of the world's key commodity exporters, particularly in terms of coal and crude palm oil.

The Indonesian rupiah appreciated 0.64 percent to IDR 13,096 per US dollar over the past week (Bloomberg Dollar Index). So far this year the currency has appreciated 5.0 percent against the greenback thus being one of the strongest emerging market currencies. In fact, the rupiah is strengthening at a pace that seems to be disliked by Indonesia's central bank.

Earlier this week, Bank Indonesia officials stated that the lender of last resort will not let the rupiah appreciate too much (especially in case the tax amnesty program turns out to be a success) in order to maintain competitive export products. Traders claim that the state-owned banks of Indonesia have already been buying US dollars last week on behalf of the central bank in order to curb significant rupiah strengthening. Although Bank Indonesia does not provide any information about its target range for the rupiah, it is expected to encourage the rupiah to stay within the IDR 13,000 - 13,250 per US dollar range.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Furthermore, among government circles there is optimism that the tax amnesty program will boost capital inflows in into Indonesia, including the stock market. The program will take effect per Monday 18 July 2016 (running until March 2017). The government is currently finalizing the investment instruments that will need to absorb additional liquidity brought about by (potential) inflows. A group of legal activists filed for a judicial review of the tax amnesty bill on claims that the bill supports criminal activity (tax evasion and money laundering) by legalizing it. However, the case is not expected to result in a further delay of the implementation of the program. A preliminary hearing for the judicial review is scheduled to be held within 14 days.

Read more: Weak Tax Revenue Indonesia in 1H-2016, Spotlight on Tax Amnesty

The government aims to see the repatriation of IDR 1,000 trillion (approx. USD $76 billion) in offshore assets currently stashed in tax havens as well as IDR 165 trillion in additional tax income.

Do you think that Indonesia's tax amnesty program will be a success?

Voting possible:  -


  • Yes, I do (50.6%)
  • No, I don't (32.8%)
  • I don't know (16.6%)

Total amount of votes: 2421

Another positive matter is that Indonesia's foreign exchange reserves rose to USD $109.8 billion at the end of June, the highest level since May 2015, supported by inflows through government global bonds, the auction of Bank Indonesia’s foreign-denominated securities, tax revenues and export earnings from the oil & gas sector, as well as the government’s withdrawal of foreign loans.

In June 2016 the government raised 100 billion yen (approx. USD $940 million) through a Samurai bonds issuance as well as €3 billion (approx. USD $3.3 billion) through euro-denominated bonds. Due to low or negative interest rates in the European Union and Japan these Indonesian bonds were popular.

Lastly, Indonesia's USD $900 million trade surplus in June 2016 is a positive result, supported by higher commodity prices as well as strong exports of electronics, auto parts, finished garments, and rubber products. In the first half of 2016 Indonesia's trade balance accumulated to a positive USD $3.59 billion surplus. However, on a year-on-year basis, the nation's exports and imports are still contracting (for the past 21 months), reflecting weak global and domestic demand. Indonesia had to cope with a wide trade deficit between late-2011 and late-2014. However, due to the decline in imports outpacing the decline in exports, the trade balance turned into positive territory. This is a concern though as weakening imports signal bleak purchasing power as well as weak investment in Indonesia (or - more generally - weak economic activity).