In line with nearly all other Asian stock markets, Indonesia’s benchmark Jakarta Composite Index (IHSG) plunged 2.15 percent to 4,412.46 points on Tuesday (01/09). After Asian trade had closed European and US indices also plummeted severely. The main reason is today’s announcement that China’s manufacturing fell to a three-year low in August 2015, yet another sign that China’s economic growth is declining faster than estimated. The country’s manufacturing PMI dropped to 49.7 in August from 50.0 in July (a reading below 50.0 indicates contraction).
As a result, China's Shanghai Composite Index sank 1.23 percent, Japan’s Nikkei 225 fell 3.84 percent, and Hong Kong’s Hang Seng Index declined 2.2 percent. Meanwhile, indices in Europe and the US (still open at the time of writing) were down about 2 percent on average by 9.30 pm local Jakarta time.
Jakarta Composite Index (IHSG):
Today, International Monetary Fund (IMF) Managing Director Christine Lagarde started her two-day visit to Jakarta and commented on the China case saying that “other emerging economies [besides China], including Indonesia, need to be vigilant to handle potential spill overs from China’s slowdown and tightening of global financial conditions.”
The Indonesian rupiah depreciated 0.22 percent to IDR 14,098 per US dollar according to the Bloomberg Dollar Index. Indonesia’s August inflation improved slightly to 7.18 percent (y/y) from 7.26 percent (y/y) in the preceding month but this failed to have a good impact on Indonesian assets given the heavy external influences. Investors also seem more interested to learn about Indonesia’s August trade balance (export-import data are scheduled to be released in mid-September). Since December 2014 Indonesia has posted a trade surplus every month. Although at first sight this seems a positive development (as it will curb the country’s wide current account deficit) a closer look reveals that the monthly trade surplus is particularly caused by plunging imports (a sign of weak domestic economic activity as well as weak domestic consumption).
Meanwhile, uncertainty about the timing of higher US interest rates continues to plague emerging market currencies, including the rupiah. Although a Fed Fund Rate hike would imply capital outflows from emerging markets as US assets become more attractive, most central banks around the globe (including those in emerging markets) request the Fed to finally tighten its monetary approach as it would make an end to current uncertainty. Amid prolonged uncertainty about the timing of higher US interest rates emerging market currencies will continue to weaken and therefore central banks prefer that the Federal Reserve will pull off the band-aid quickly. The Fed Fund Rate hike could temporarily cause a shock (severe capital outflows from emerging markets) but after the storm has ceased those emerging markets that have strong macroeconomic fundamentals expect to see capital inflows again soon.
However, whether the Federal Reserve will raise interest rates in September remains one of the big questions that plague the minds of investors and policymakers around the globe. Although recent US macroeconomic data are solid, recent turmoil in China (triggering heavy volatility in financial markets across the world) may make the Fed decide to postpone such a hike. Slowing economic growth in China also impacts negatively on the US economy, while an interest rate hike would make a strong US dollar even stronger (negatively impacting US export performance) and thus may disturb the currently still fragile US economy. Today, it was announced that US factory activity fell to 51.1 in August (from 52.7 in July), the slowest pace since May 2013 and below analysts’ expectations (at 52.6). It is obvious that the sluggish global economy, led by China’s slowdown, causes US export orders to be under pressure.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.38 percent to IDR 14,081 per US dollar on Tuesday (01/09).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
It was also announced that Indonesia sold IDR 10 trillion (approx. USD $710 million) worth of conventional bonds at an auction today. The Indonesian Finance Ministry said the result was in line with the indicative target. Total bids were IDR 16.38 trillion, below the IDR 20.89 trillion received on 18 August 2015, with the highest bid-to-cover ratio at 2.95 for the three-month T-bills. As of 28 August, foreign investors hold 37.8 percent of total Indonesian government rupiah bonds.
Conventional Bond Auction Indonesia (1 September 2015):
|Type of Bond||Weighted Average Yield|
Will the rupiah fall to IDR 15,000/USD this year?
Voting possible: -
- No, Bank Indonesia will intervene (31.6%)
- Yes, external pressures are too high (28.1%)
- Yes, domestic economic conditions are bleak (21.1%)
- No, after the Fed Fund Rate hike pressures will ease (19.3%)
Total amount of votes: 114