Indonesia suffers as Fed sparks sell-off

kikimiqbalsoft - RI suffers as Fed sparks sell-off The Indonesian stock market and currency suffered worse than any in the region on Thurs...

kikimiqbalsoft - RI suffers as Fed sparks sell-off The Indonesian stock market and currency suffered worse than any in the region on Thursday after the US Federal Reserve signaled it would raise interest rates earlier than expected, spurring fears the Indonesian economy would be negatively affected by the hike.

The Jakarta Composite Index (JCI) fell 2.5 percent, the most since Jan. 27, to close at 4,698.9, the worst performer in Asia of the day. The rupiah also led losses in Asian currencies as it depreciated by 1.1 percent to hit 11,445 per US dollar, its steepest one-day decline in four months, according to Bloomberg.

Meanwhile, the yield for 10-year government bonds climbed nine basis points to reach 8.05 percent, the highest level since February.

The sell-off in Indonesia’s bond and equity markets occurred after the US Fed chairwoman, Janet Yellen, said in a press briefing Wednesday that she might hike the benchmark Fed funds rate “around six months” after the quantitative easing program ends.

“This means that the Fed may hike its interest rate at the beginning of 2015, leading to tighter global liquidity,” Finance Minister Chatib Basri said Thursday in his office.

“Like it or not, all emerging market economies must adjust their interest rates,” he noted. “I think we’re already on the right path, as both the monetary and fiscal authorities are pursuing a tight-biased policy stance.”

An increase in the Fed funds rate, which currently stands at a range of 0-0.25 percent, would make US assets more attractive, ultimately triggering capital outflows from emerging economies, analysts have warned.

Indonesia could suffer the most from threats of capital outflows. Every 1 percent increase in the Fed funds rate could lead to potential deviation in Indonesia’s economic output of up to minus-1.25 percent within two years, resulting in one of the steepest falls in the world, according to Bank Indonesia (BI).

Having taken a beating in 2013, Indonesia has so far fared better this year, thanks to improvements in its macroeconomic fundamentals, such as a narrower current-account deficit and declining inflation.

Despite Thursday’s losses, the JCI has surged 9.9 percent year-to-date, the most among 13 world benchmark indexes, according to Indonesian Stock Exchange data. The rupiah is now Asia’s best-performing currency of the year as it has appreciated 6 percent, according to BI data.

“We are stronger now, but that doesn’t mean we are no longer vulnerable, so the government must remain alert,” said Iwan J. Azis, an economist with the Asian Development Bank (ADB).

The threat of the contagion of capital outflows in the emerging market is “certainly higher than it was” last year, he warned.

The major slump in the JCI came only days after the announcement that the Indonesian Democratic Party of Struggle (PDI-P) would nominate popular Jakarta Governor Joko “Jokowi” Widodo for president sent the stock market soaring up 3.2 percent last Thursday.

Amid prevailing uncertainty in the global economy, Indonesia’s political euphoria might amount to no more than short-term support for its equity market, analysts have said.

“The ‘Jokowi effect’ might not mean much if the Fed, supposedly reducing quantitative easing gradually, chooses to do so in a dramatic way, or when it finally decides to hike interest rates,” said Ali Setiawan, the head of global markets with HSBC Indonesia.

Meanwhile, BI Governor Agus Martowardojo warned on Thursday that uncertainty over the US Fed’s interest rate policy would pose risks to the Indonesian economy.

“From the global front, the risks include impact from the Fed’s policy, economic growth that is not as high as we expect and high vulnerability of emerging economies to external volatility,” said Agus during a presentation at the central bank headquarters in Central Jakarta.

“We will respond accordingly to the Fed’s signal with a set of policies that we are now preparing,” said Agus, without going into details.

Most emerging-market stocks and currencies fell more than they had in more than two weeks due to Yellen’s statement.

The MSCI Emerging Markets Index sank 1.5 percent to 936.79 at 1 p.m. in London. The emerging-market gauge has lost 6.6 percent this year and trades at 9 times 12-month projected earnings, the cheapest valuation since November 2011, data compiled by Bloomberg show. The MSCI World Index fell 1 percent in 2014, taking its multiple to 14.6.

Fed bond-buying, which was cut by another US$10 billion, will conclude by year-end with a rate increase to follow in “around six months”, Yellen said.

“The Fed speech yesterday [Wednesday] indicated that it will raise interest rates a bit sooner than expected, which is causing a bit of weakening in EM [emerging market] currencies,” Hertta Alava, head of emerging markets at FIM Asset Management Ltd. in Finland, told Bloomberg.--



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