Since the start of 2015, Indonesia’s Jakarta Composite Index has fallen 4.06 percent, far worse compared to other benchmark indices in Southeast Asia so far this year: Singapore (-1.33 percent), Malaysia (1.24 percent), Thailand (+0.71 percent), the Philippines (+3.52 percent), and Vietnam (+6.27 percent).

Jakarta Composite Index (IHSG):

Foreign investors engaged in net selling of Indonesian stocks as the rupiah continued to weaken. These investors are primarily concerned because of two external factors, i.e. looming higher US interest rates and the Greek debt crisis. Several Indonesian blue chip stocks that fell sharply were Bank Mandiri (-3.51 percent), Bank Rakyat Indonesia (-2.65 percent), Semen Indonesia (-1.89 percent), Unilever Indonesia (-1.42 percent), and Astra International (-1.07 percent).

Upbeat US jobs data triggered heightened expectation of an interest rate hike in the USA before the end of 2015. Many analysts and market participants are expecting the Federal Reserve to raise interest rates in September 2015, a move that would cause capital outflows from emerging economies such as Indonesia. The US Labor Department said late last week that the world's largest economy created 280,000 jobs in May (better-than forecast).

Today, Mitsuhiro Furusawa, Deputy Managing Director at the International Monetary Fund (IMF), warned that a US interest rate hike would imply serious and severe spill-over risks as yields sharply increase and capital flows reverse. Furusawa said that this disorderly process would involve impaired liquidity in certain markets or asset classes. The negative spill-over effects can be reduced if the Federal Reserve continues to clearly communicate its policy intentions, and emerging markets continue to strengthen their macroeconomic fundamentals (partly by implementing structural reforms).

Apart from looming higher US interest rates, the world is also holding its breath for the Greek debt crisis in the Eurozone. The debt-ridden country announced late last week that it would delay the latest 300 million euro repayment to the IMF until the end of June. This decision led to frustration among its Eurozone creditors and heightened concern that Greece may not be able to pay its debt. Job Swank, Chief Economist at the Dutch Central Bank, believes that the impact of a Greek exit (“Grexit”) from the Eurozone would be hard to calculate, but certainly forms a major economic shock. He added, however, that he does not expect the Grexit to happen.

Compared to other emerging market assets Indonesian stocks and the rupiah are more effected by the aforementioned external factors because the Indonesian economy is plagued by several troubles. Firstly, the country has been experiencing slowing economic growth since 2011. In Q1-2015 GDP growth slowed to a five-year low of 4.71 percent (y/y). This poor performance is reflected by a high degree of lower-than-expected corporate earnings reports of listed Indonesian companies in the first quarter. Secondly, ahead of the Ramadan and Idul Fitri celebrations (which always bring inflationary pressure) Indonesian inflation accelerated to 7.15 percent (y/y) in May 2015, meaning that Bank Indonesia is not likely to cut its current interest rate environment (with the benchmark interest rate at 7.50 percent). Indonesia’s relatively high interest rate environment is partly to blame for slowing economic growth as it limits credit expansion and domestic consumption. Thirdly, Indonesia is still plagued by a wide current account deficit (CAD). The CAD is expected to remain around 3 percent of GDP in 2015. Lastly, Indonesia’s foreign exchange reserves declined to USD $110.77 billion at the end of May (from USD $110.87 billion in the preceding month), partly the result of central bank efforts to defend the rupiah in the foreign exchange market.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.54 percent to IDR 13,360 per US dollar on Monday (08/06).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia