Emerging currencies in Asia, led by the Indonesian rupiah exchange rate, strengthened in the past week on positive economic data from the US and China, the world’s two largest economies. Companies in the US added more jobs than expected in June 2014, while manufacturing in China grew at its fastest pace in 2014. Improving economies of the US and China are important for Asian countries as it boosts Asian exports. Moreover, Indonesian inflation and trade data contributed to positive market sentiments.
On 1 July 2014, Statistics Indonesia announced that inflation was relatively low in June 2014 at 0.43 percent (month-to-month). On a year-on-year basis, inflation eased to 6.70 percent from 7.32 percent in the previous month. Meanwhile, the country’s trade balance swung back into a surplus in May (USD $69.9 million) after a worrying USD $1.96 billion trade deficit in the previous month.
Indonesia also conducted a successful euro-denominated bond sale earlier this week in which it collected 6.7 billion euros amid low borrowing costs in Europe. Bloomberg reported that “the nation issued the seven-year notes at 2.976 percent, or 195 basis points above the euro mid-swap rate. [..] That compares with the 4.032 percent secondary-market yield on similar-maturity sovereign dollar securities of Indonesia.” Indonesia needed proceeds from its debut euro bond sale to finance the country's fiscal deficit, which had recently been raised from 1.69 percent of gross domestic product (GDP) to 2.4 percent of GDP.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 1.78 percent this week to IDR 11,887 per US dollar.| Source: Bank Indonesia
However, the upcoming presidential election (scheduled for Tuesday 9 July 2014) can cause great rupiah volatility next week if the market is not content with the newly elected leader. The election has become a tight race between Jakarta Governor Joko Widodo (Jokowi) and former army general Prabowo Subianto according to the recent popularity polls. The market clearly favours reform-minded Jokowi instead of controversial candidate Subianto. Survey firm Roy Morgan said that the outcome of the presidential election is “too close to call”.
Jakarta Composite Index (IHSG)
The benchmark stock index of Indonesia (Jakarta Composite Index or IHSG) climbed 0.35 percent to 4,905.83 points on Friday (04/07). It means that ahead of the presidential election next Tuesday, the stock market had a relatively solid week, rising 1.25 percent during the week (despite polls indicating that the gap between Jokowi and Subianto has narrowed). The solid performance of the IHSG was also supported by the positive aforementioned US and China data. Many foreign investors, however, prefer to wait & see for the result of the presidential election first.
A positive message was also presented by Indonesian Finance Minister Chatib Basri who expects the Indonesian economy to grow slightly faster in the second quarter of 2014 (+5.3 percent year on year) compared to the performance in this year’s first quarter (+5.21 percent).