The benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) closed 1.12 percent higher on Wednesday (17/09) supported by Tuesday’s positive stock indices on Wall Street as well as speculation that the US Federal Reserve will not raise its key interest rate yet. Today (17/09), the Federal Reserve will conclude its Federal Open Market Committee (FOMC) meeting. Lastly, after weak economic data, it was reported that China’s central bank (PBOC) injected USD $82 billion into the country's five largest banks.
Financial stimulus in the China, in an attempt to boost China’s economic growth, provides positive market sentiments for investors. A strengthening of China’s economy will lead to more Indonesian exports.
When interest rates in the USA rise, Indonesia is expected to be hit by capital outflows. Generally emerging economies will see capital outflows as US dollars will be pulled out from riskier assets. However, especially those emerging markets that have fiscal weaknesses will be vulnerable. Indonesia is one of these vulnerable countries as it has to cope with a wide current account deficit. Indonesia’s current account deficit widened to USD $9.1 billion, or, 4.27 percent of the country's gross domestic product (GDP) in the second quarter of 2014.
The next Joko Widodo-led Indonesian government, which will be inaugurated in late October 2014, is also expected to raise prices of subsidized fuels. This will result in accelerated inflation and therefore the central bank (Bank Indonesia) may be forced to raise its benchmark interest rate (BI rate) from the current level of 7.50 percent (a higher BI rate is also a strategy in anticipation of capital outflows in case of higher US interest rates). Companies engaged in interest rate sensitive sectors - such as banking, property and automotive - will then feel the negative impact.
The Jakarta Composite Index ended on 5,188.18 points on Wednesday (+1.12 percent):
Meanwhile, the Indonesian rupiah exchange rate was flat. Based on the Bloomberg Dollar Index, Indonesia’s currency appreciated 0.01 percent to IDR 11,970 per US dollar. Rising Indonesian stocks and Chinese stimulus managed to support the rupiah although market participants are mostly awaiting the results of the FOMC meeting.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.04 percent to IDR 11,908 per US dollar on Wednesday (17/09).