Stock Market & Rupiah Update Indonesia: China Data, Oil Price & Capital Surcharge
In a draft regulation, Indonesia's Financial Services Authority (OJK), the government agency that regulates and supervises the financial services sector, proposes that the country's leading banks have set aside more capital - between 1 and 3.5 percent of their risk-weighted assets (a "capital surcharge") by December 2015 - as a buffer against financial market volatility risks. The new policy aims to strengthen Indonesia's financial system amid the country's economic slowdown and severe external pressures (looming higher US interest rates and China's slowdown).
However, Indonesian authorities claim that this new policy is not a response to recent financial turmoil (which led to heavily falling Indonesian stocks and rupiah). Reportedly, the policy has already been for years among the OJK, Indonesian Finance Ministry and central bank (Bank Indonesia) as these institutions want to enhance financial system stability in times of storm.
Although the latest data from Bank Indonesia indicate that Indonesian banks' capital adequacy ratios are solid at an average of 20.5 percent in July 2015, pressures have grown as credit growth in Indonesia slowed while non-performing loans (+2.6 percent) have climbed. Moreover, earnings have fallen. Whereas prior to 2015 most leading Indonesian banks had gotten used to posting double-digit profit and revenue growth, this has fallen to single-digit figures or negative growth in 2015.
This new policy may be the reason why Indonesia's leading listed banks are showing a poor performance on Tuesday (13/10). Shares of banks such as Bank Central Asia (BCA), Bank Mandiri, Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI) are declining rapidly on today's trading day as they may have to face higher deposit-insurance premiums and additional capital buffers.
Indonesia's benchmark stock index (Jakarta Composite Index) had fallen 2.68 percent to 4,506.81 points by 14:40 pm local Jakarta time on Tuesday (13/10). This performance is in line with the performance of other Asian indices. Asian assets are under pressure today - after last week's impressive rally - on the back of weak Chinese trade data and the lower oil price. Although China's trade balance widened to 376.2 billion yuan in September 2015 (hence beating forecasts), its exports contracted by 1.1 percent while imports plunged 17.7 percent (the 11th straight month of decline), in yuan terms.
Meanwhile, oil prices plunged after the Organization of the Petroleum Exporting Countries (OPEC) said that crude output had climbed to an average of 31.57 million barrels per day in September (the highest level since 2012).
The Indonesian rupiah is the worst-performing Asian currency today, having depreciated 1.38 percent to IDR 13,593 per US dollar by 14:35 pm local Jakarta time (Bloomberg Dollar Index), the biggest plunge in two months. Last week, Indonesia's currency appreciated by a staggering 9.1 percent. However, investors are now engaging in profit taking, especially as last week's surge may have been excessive and not supported by fundamentals.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.7 percent to IDR 13,557 per US dollar on Tuesday (13/10).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Coming Thursday (15/10), Bank Indonesia will hold its next policy meeting (Board of Governor's Meeting). Most analysts expect Indonesia's central bank to keep its key interest rate (BI Rate) at 7.50 percent and the overnight deposit facility rate and lending facility rate at 5.50 percent and 8.00 percent, respectively at the October policy meeting as Indonesian assets remain vulnerable ahead of looming higher US interest rates, while inflation was still not within the central bank's target range of 3-5 percent (y/y) in September (6.83 percent y/y).
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