Possible End to Quantitative Easing Will Impact on Emerging Economies
Worldwide, most stock indices fell on Wednesday (07/08), particularly Japan's Nikkei index, after it has been speculated that the Federal Reserve may phase out the third round of its quantitative easing program in September 2013. This program, involving a monthly USD $85 billion bond-buying package, aims to spur US economic growth while keeping interest rates low. However, one important side effect has been rising stock markets around the globe. Now the end of QE3 is in sight, investors shy away from riskier assets.
Indonesia is one of the emerging economies that feels the impact of the possible end to the Fed's quantitative easing program. When in May 2013 the American economy started to show serious signs of continued economic recovery, speculation about a policy change surged. As a result, Indonesia's main stock index (IHSG) fell about 11 percent between late May and 2 August 2013, the last trading day before the Lebaran holiday. Apart from this 'external' factor, the country has also been facing internal problems that contribute to investors' waning confidence in the Indonesian market. These internal factors include weak exports (mainly due to low global demand for Indonesian commodities, especially with slowing economic growth in China) and the subsequent trade deficit, higher inflation (caused by the government's decision to increase the price of subsidized fuels in June 2013), and a weakening rupiah.
Indonesia's central bank reacted by raising the country's benchmark interest rate twice in recent months to 6.50 percent. Economic growth of Indonesia in 2013 has been revised downwards to below the 6 percent mark by various institutions, the slowest annual growth rate since 2009.
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