Indonesian Stocks & Rupiah Down on GDP Growth Concern & China Turmoil
Indonesian stocks and the rupiah weakened further on Wednesday (08/07) due to the continuing fall of Chinese stocks (raising concerns about global economic growth) and the downward revision of the World Bank and Asian Development Bank (ADB)’s economic growth forecasts for Indonesia in 2015. Furthermore, global uncertainty brought about by the looming Greek exit (Grexit) from the euro continues to plague markets worldwide and makes investors prefer to wait for more certain times.
Despite efforts of China’s government to stop the sell-off that has been going on for several weeks, the Shanghai Composite Index declined 5.9 percent on Wednesday (08/07), while Chinese bonds traded offshore were also being dumped by investors. Chinese authorities tried to stop the sell-off by freezing hundreds of stocks from trading. The Shanghai Index has now plunged 32.1 percent since mid-June.
Chinese stocks have been declining steeply after the forming of a bubble. While the economy of China has been slowing, investors (which includes taxi drivers and college students) continued to invest in Chinese stocks, hence causing stocks to become overvalued and detached from economic reality.
Turmoil in China spilled over to Hong Kong where the Hang Seng Index fell 5.8 percent but also to other regions across the world, including Indonesia and the United States, as turmoil in China can drag down the pace of global economic growth and impact negatively on earnings of those companies closely linked to Chinese growth. Therefore, the Dow Jones Industrial Average weakened over 1 percent after opening on Wednesday.
Indonesia’s benchmark Jakarta Composite Index fell 0.70 percent to 4,871.57 points on Wednesday. Although the index was already in red territory for most of the day, in the afternoon it dropped more severely after it became known that the World Bank had drastically cut its economic growth forecast for Indonesia in 2015. The institution now expects the Indonesian economy to grow 4.7 percent (y/y) in full year 2015, down from an earlier forecast of 5.2 percent (y/y). One day earlier, the Asian Development Bank (ADB) had announced that it revised its economic growth forecast for Indonesia in 2015 from 5.2 percent (y/y) to 5 percent (y/y). As such, it seems more and more likely that Indonesia’s slowing economy will persist through 2015 (since 2011 the economy of Indonesia has been slowing). Investors will be interested to learn Q2-2015 corporate earnings reports of listed Indonesian companies that are to be released soon.
Jakarta Composite Index (IHSG):
Several state-controlled stocks, including Bank Rakyat Indonesia, Semen Indonesia and Jasa Marga, are being sold by investors on concern about government intervention negatively affecting corporate performances of these companies (for example the government’s decision to lower prices of cement in a bid to strengthen people’s purchasing power). Investors are also concerned about the government’s upcoming IDR 39.92 trillion capital injection into several state-controlled companies. This injection aims at increasing state enterprises’ capacity in infrastructure development. For listed state-owned companies this capital injection will come in the form of a rights issue, which may dilute public ownership.
Meanwhile, Indonesia’s rupiah depreciated 0.20 percent to IDR 13,356 per US dollar on Wednesday (08/07) according to the Bloomberg Dollar Index. Apart from the subjects mentioned above, negative market sentiments also originated from the country’s falling foreign exchange reserves. In June, Indonesia’s foreign exchange reserves fell USD $2.8 billion to USD $108.0 billion (from USD $110.8 billion one month earlier) due to debt repayment and the use of foreign exchange to stabilize the rupiah exchange rate. So far this year, the rupiah has depreciated 7.3 percent against the greenback.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.25 percent to IDR 13,346 per US dollar on Wednesday (08/07).