July 5, 2016 edition
Financial markets around the globe are having the Brexit Blues. Britain's decision to break free from the European Union through a referendum on June 23 has wreaked havoc, evaporating trillions of dollars from investors' fund. But for Indonesia, Brexit's impact is not entirely negative. In fact, Indonesia's market has enjoyed a form of Brexit boost.
For one, it seems certain that Brexit will force the US Federal Reserve to reconsider its plans to raise its reference rate. As we know, if the Fed rate goes up, the rupiah will take a serious hit. So far, Brexit's direct impact on the rupiah has been weak. The not-so-steep-drop in the rupiah since Brexit is more due to a stronger US dollar.
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More Economy articles in other editions
June 28, 2016 edition
The nightmare of rising market volatility has begun with the British public finally deciding to leave the European Union (EU). Last week, banks were busy preparing for the possibility of the worst scenario. With business confidence tumbling, there is a playback of past financial crises, where foreign funds in global financial markets, including emerging markets, were suddenly pulled back to their home country.
Here in Indonesia, the scenario would start with a weakening of the rupiah, followed by rising interest rates, to stem the foreign funds outflow, which inevitably halts our already slow economic growth. The nightmare gets worse with the continued weak global economy, as it negates a rapid economic recovery, as in previous financial crises. With uncertainty over the United Kingdom's (UK) access to the European market, its economy and the pound are expected to take a significant hit.
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June 21, 2016 edition
It is the destiny of financial markets to be perpetually shrouded in uncertainty. These last few weeks, this sense of ambiguity is becoming more evident. Investors worldwide are forced to continue waiting as key institutions, once again, delay critical decisions.
Tuesday night, in New York, Morgan Stanley Capital International (MSCI) Inc. sent shivering news to investors owning Chinese shares. Once again, MSCI excluded Chinese A-shares listed in mainland bourses from the MSCI Emerging Market (EM) Index. Those who are already holding long positions, expecting a massive price-hike, were caught with their pants down.
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June 14, 2016 edition
Disappointing US employment numbers is likely to delay the planned US dollar interest rate hike. Last week, Federal Reserve Chief Janet Yellen stressed uncertainties faced by the US economy, prompting analysts to project a delay in a US dollar interest rate hike to August or September of this year. Coming at the first day of the Ramadhan fasting month, it gave the rupiah and other regional currencies some breathing room, with the rupiah strengthening and stabilizing at Rp13,200 per US dollar. But Bank Indonesia has also been quite active in defending its currency, reflected by the drop in its exchange reserves to US$103.6 billion from US$107.7 billion a month ago. The question is whether this trend can be maintained and whether the central bank will move to stimulate the economy by further bringing down the rupiah's current 6.75 percent benchmark interest rate.
The month of Ramadhan always brings with it a positive boost to the economy as consumption rises. But this surge, if not managed well with sufficient food supplies, could also raise prices. Indeed, this is already happening. Inflation is always higher during Ramadhan, but it has a tendency to shoot far beyond Bank Indonesia's inflation target. Should this occur, it makes moving down the rupiah interest rate more difficult, even with a more stable currency.
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June 7, 2016 edition
Indonesia has missed an opportunity to graduate this month. Last Wednesday, Standard & Poor's (S&P) global ratings confirmed that Indonesia's rating will remain in non-investment grade territory. In S&P language, that means BB+, just one notch short from getting out of the junk category. No offence taken, in financial market lingo, non-investment grade bond is simply a junk bond.
Two weeks ago, the hope of passing that critical one notch emerged when an S&P entourage came to Jakarta for an evaluation, and even paid a short visit to President Joko Widodo. The government's public relation machinery wasted no time in flooding the media with positive signals. Officials boasted that Indonesia deserves to get an investment grade rating.
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May 31, 2016 edition
Last week, we witnessed several global events, each raising doubts of a quick Indonesian economic recovery this year. Even Bank Indonesia has recently revised down their 2016 growth projections from their earlier 5.4 percent estimate to its current subdued 5.2 percent. Plus, several government options to spur growth are quickly narrowing down to a limited few.
One of these events was last week's G-7 meeting in Tokyo, where seven major industrialized countries failed to reach an agreement on how best to coordinate monetary and fiscal policies to revive their lackluster economies. For example, the Japanese government still wanted to prevent its currency from strengthening further so it can push exports and limit imports, which was promptly opposed by the United States. There were also differences on how best to push growth. Some preferred a loose monetary policy that brings down interest rates, while others felt that a more aggressive fiscal policy, involving more government spending was called for. Unfortunately, this means that global economic growth will remain weak and cannot be relied on to boost Indonesian economy through exports.
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May 24, 2016 edition