In line with the performance of most stocks in Asia, Indonesia's benchmark Jakarta Composite Index plunged 1.66 percent to 5,281.92 points on Friday (09/09). Several matters brought negative market sentiments to Asia: the European Central Bank (ECB) seems unwilling to boost asset purchases, North Korea conducted its fifth nuclear test, while Indonesia's central bank announced that the nation's retail sales expanded at a slower pace in July 2016. Meanwhile, the Indonesian rupiah depreciated 0.34 percent to IDR 13,108 per US dollar (Bloomberg Dollar Index).
Especially foreign investors were eager to sell Indonesian stocks on the last day of the trading week. Foreigners recorded a net sell of IDR 914 billion (approx. USD $70 million).
European Central Bank Stimulus
Although investors expected the European Central Bank (ECB) to add stimulus to boost the local economy - for example by allowing different types of asset purchases or extending the quantitative easing (QE) program's end date (currently set at March 2017) - it did neither. The ECB announced that it left interest rates unchanged after the policy meeting earlier this week. The institution did emphasize that it will continue to do its best to keep interest rates low, well beyond the end of the QE program. As such, investors can draw the conclusion that the ECB is serious about stopping the QE program in March 2017.
Given that the US Federal Reserve had already scrapped its bond-buying program at the end of 2014 and is eager to tighten its monetary policy, it implies that the period of large capital inflows into equity may soon be over.
Meanwhile, the ECB also lowered its economic growth and inflation forecasts for the next two years. This added negative sentiments to markets worldwide. The institution cut its 2017 economic growth outlook for the European Union to 1.6 percent (y/y), from 1.7 percent (y/y) previously, due to risks stemming from the Brexit issue (Britain's decision to exit the European Union). The ECB also expects inflation to continue to undershoot the ECB's target in the next couple of years as economic growth remains weak.
North Korea's 5th Nuclear Test
North Korea confirmed it had conducted its fifth - and largest (reportedly more powerful than the atom bomb that was dropped on Hiroshima) - nuclear test on Friday morning (09/09), the 68th anniversary of its founding. The nation stated that is has "mastered the ability to mount a warhead on a ballistic missile". Most nations announced that they oppose and condemn the ongoing nuclear tests in North Korea. The latest test became known after a 5.3 magnitude earthquake was detected in North Korea (the shallow surface level indicated that it was an artificial quake).
In response to the fifth nuclear test, the United Nation's Security Council announced that it will draw up new sanctions against North Korea. This is required especially now Kim Jong-un's rhetoric has become increasingly aggressive. However, whether sanctions will be able to curtail North Korea's nuclear plans is highly doubtful. North Korea has been subject to UN sanctions since 2006 when it conducted its first nuclear test. However, these sanctions did not stop the isolated nation from continuing its program.
Indonesia's Tax Amnesty Program, GDP Growth & Retail Sales
Investors may also have become less optimistic - or pessimistic - about the success of Indonesia's tax amnesty program. On Wednesday (07/09), Bank Indonesia Governor Agus Martowardojo said the central bank of Indonesia only expects to see IDR 21 billion (approx. USD $1.6 billion) in additional tax revenue through the program for the state and only USD $13.8 billion in fund repatriations. These new projections are significantly below the central bank's earlier projections and far below the government's targets. Bank Indonesia decided to revise its projection after the disappointing start of the program.
Meanwhile, growth of Indonesia's retail sales eased to 6.7 percent (y/y) in July, down from a (revised) growth pace of 16.4 percent (y/y) in the preceding month. Although the drop is actually not a surprise - Indonesia's consumer spending and demand having turned normal after the Idul Fitri holiday at the start of July - the news added negative sentiments on a day that brought few reason for optimism. Household consumption accounts for approximately 57 percent of total economic growth in Indonesia and therefore constitutes the biggest engine for economic growth.
Lastly, over the past couple of days Indonesian authorities also uttered less optimistic forecasts for Indonesia's GDP growth in 2016 and 2017. The government and House of Representatives agreed to put 2017 economic growth at 5.1 percent (y/y) in next year's state budget, down from an earlier assumed 5.3 percent (y/y). Meanwhile, Indonesian Finance Minister Sri Mulyani Indrawati said the government's growth target in the 2016 budget (5.2 percent) will most likely not be achieved. She expects growth to reach 5.1 percent (y/y) this year.
On Monday (12/09) Indonesian markets will be closed for an Islamic celebration (Idul Adha, the Muslim day of sacrifice).