For several weeks now, Indonesia's main stock index (IHSG) has been experiencing a sharp correction. As I wrote in my previous columns, market participants have been waiting for several important macro economic data, to wit Indonesia's economic growth figure for the second quarter of 2013, the July 2013 inflation rate, and the country's trade balance statistics for the first six months of this year. Now all above results have been released, we can analyze further the impact of these macroeconomic results as well as investors' reaction to it.
If we take a look at the results, we find that they are not positive:
• Indonesia's economy grew 5.81 percent in Q2-2013, while it had been expected to grow between 5.9 and 6.2 percent.
• Monthly inflation in July 2013 reached 3.29 percent, seriously surpassing the central bank's target of 2.3 percent.
• Indonesia trade deficit continues: in Semester I-2013, the deficit stood at USD $3.3 billion (imports of oil and gas reached USD $5.8 billion, while Indonesia's surplus in the non-oil and gas sector was recorded at USD $2.5 billion).
Indonesia's Gross Domestic Product (GDP)
It is clear that Indonesia's economic expansion is experiencing a slowdown. In the second quarter of 2013, Indonesia's economy grew 5.81 percent although in recent years the country posted growth figures above the six percent: 6.1 percent (2010), 6.5 percent (2011) and 6.2 percent (2012). The slowing global economy in the past two years has impacted significantly on Indonesia's economic growth. Indonesia's domestic consumption (which accounts for about 55 percent of the country's economic growth) has lost momentum as the central bank of Indonesia (Bank Indonesia) raised the benchmark interest rate (BI rate) twice in the last two months from 5.75 percent to 6.50 percent. Although Indonesia's slowing economy is in line with the slowing global economy, the country's Q2-2013 GDP growth result was lower than most investors expected and thus a reason for investors to react by selling Indonesian assets.
Economic Growth 2007-2013 (annual percentage change)
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Indonesia's July 2013 Inflation Rate
The pace of Indonesia's inflation rate in July 2013 was significantly higher than projected. The cumulative inflation rate of 2013 (January up to July) now stands at 6.75 percent, while year-on-year it is 8.61 percent. July's core inflation was 0.99 percent and 4.44 percent year-on-year. This development is a real cause of concern because the government's revised inflation target for 2013 is 'only' 7.2 percent. Particularly food products, followed by transportation, communication and financial services were contributors to the country's total inflation rate. It indicates that the government has not been able to control food prices after prices of subsidized fuels had been raised in June 2013. Bank Indonesia (BI) reacted by raising the benchmark interest rate to 6.50 percent. However, BI should understand that the rise in inflation is due to the tariff policy, not because of excess liquidity in the market. As such, a number of BI policies, such as raising the BI rate and Foreign Currency Statutory Reserve Requirements (Giro Wajib Minimum), absorb liquidity in the market and result in market contraction. On the one hand, BI is shielding the rupiah from moving wildly, but the institution seems to forget that foreign investors are recording net sells of Indonesian assets because Indonesia's macroeconomic fundamentals have not met previous projections and expectations.
(annual percent change)
¹ year to date
Source: Statistics Indonesia
Indonesia's Trade Deficit in Semester I-2013
Indonesia's continuing trade deficit is also closely watched by market participants because the deficit erodes the country's foreign exchange reserves. These reserves now amount to USD $92.67 billion only and bring along negative market sentiments. Main reason for the trade deficit are weak global commodity prices (commodities are Indonesia strongest export earner). As value-added industries in Indonesia are still lacking, the country more or less relies on the export of raw materials of which prices have weakened considerably amid global economic turmoil.
After digesting the above information, I consider it is quite normal that the IHSG has been and will continue to be on a weakening trend in the weeks ahead. Although various company results in Semester I-2013 are good (particularly those companies active in Indonesia's property, construction and consumption sectors), the slowing macroeconomy and higher capital costs seem to indicate that economic growth will slow further in the second half of this year.
As such, I believe the 'storm' will continue to plague the 'ship of the IHSG' in the foreseeable future but will not cause the ship to sink. After this storm, the IHSG should be strong again, but, besides the global aspect, it also depends on how the government deals with the storm. If it is able to maximize efficiency and absorption of its budget spending then economic growth can get the much-needed boost.
David Sutyanto is a research analyst at Jakarta-based First Asia Capital