Indonesia's benchmark Jakarta Composite Index was up 0.52 percent to 4,736.52 points by 15:45 pm local Jakarta time on Monday (23/05), while the rupiah had appreciated 0.25 percent to IDR 13,573 per US dollar (Bloomberg Dollar Index).

The release of the Federal Reserve's hawkish minutes on Wednesday (18/05), covering the Fed's April policy meeting, made investors and analysts realize that another interest rate hike in the USA could come soon-than-expected, perhaps even as early as June. Therefore, market participants will be eager to hear Fed Chair Janet Yellen's speech on Friday. However, a June rate hike may be unlikely as there will not be enough US macroeconomic data to collect before the next policy meeting (14-15 June), while the Brexit vote result on 23 June 2016 could rock markets. The UK Treasury said a year-long recession could be sparked in Great Britain if it leaves the European Union. Considering these uncertainties, it could make Fed officials decide to wait at least one more month before tightening US monetary policy further.

Indonesia collected IDR 3.92 trillion (approx. USD $290 million) from the sale of retail bonds (dubbed saving bonds) on Monday (23/05). These bonds, which need to be held until maturity in 2018 (implying they cannot be sold on the secondary market), bear a floating interest rate with a minimum coupon of 7.50 percent. The Finance Ministry stated that over 11,900 Indonesian citizens bought the notes; a good result considering that the government aims to reduce the dependence on foreign funds.

Meanwhile, a recent study conducted by the International Monetary Fund shows that the accomodative monetary policy of Japan has a significant positive impact on Southeast Asian emerging markets such as Indonesia, Malaysia, the Philippines, and Thailand. However, US Treasury Secretary Jacob Lew urged Japan to refrain from intervening in the currency markets - devaluing the yen - to boost exports.

Japanese stocks were under pressure on Monday (23/05) after it was reported that the country's exports fell 10.1 percent (y/y) by value in April, a deterioration from March's 6.8 percent (y/y) decline.

To What Extent Should We Be Concerned about Another Fed Funds Rate Hike?

Several analysts say investors need not to worry too much about monetary tightening in the USA because the Federal Reserve will raise interest rates gradually and carefully to avert shock reactions in markets. In the case of Indonesia, economic fundamentals should be strong enough to cope with a US interest rate hike (the same scenario that we saw in December 2015 when the Fed raised its key rate for the first time in nearly one decade). Indeed, the rupiah depreciated significantly over the past couple of days but this should be a temporary phenomenon. However, what are Indonesia's weaknesses that make Indonesia vulnerable to a Fed Funds Rate hike?

Indonesia has a relatively low level of foreign exchange reserves (USD $107.7 billion at end-April 2016)
Although improving, Indonesia's current account deficit is still wide (2.1 percent of GDP in Q1-2016) and undermines investors' confidence in Indonesia's economic fundamentals
A relatively large portion of Indonesian assets are in the hands of foreign investors and therefore capital outflows from Indonesia can emerge easily in times of global shocks (for example, foreigners own nearly 40 percent of Indonesia's government bonds)