Is it Really Over?

INDONESIA - Report 24 Sep 2013 by Cyrillus Harinowo and Maria Kartika Purisari

Executive Summary

Calming good news in the media seems to have quelled late-August/mid-September financial jitters in the Indonesian financial market; at least, the long lines in front of the exchange houses have dwindled. We now see light at the end of the tunnel.

The first bit of good news came from the chief economist of Nomura Securities, who argued that emerging markets were stabilizing. His statement helped calm the market. A few days later an IMF official pronounced Indonesian government and Central Bank policies adequate in the short term. The third piece of (very important) good news was Bank Indonesia’s statement that its FX reserves didn’t fall in August; in fact, they rose a bit. This was all capped off by the best news of all: that the Fed had decided to delay the tapering of QE.

The Indonesian Composite Stock Market Index began rebounding in the second and third weeks of September, from a nadir of 4000 in August, to above 4500 by the third week of September, and briefly topped 4600 after the Fed announcement. That compares with 4,316 at the end of 2012. Simultaneously, the currency was strengthening, from Rp. 12,000 to nearly Rp. 11,000 per dollar. That came as a relief for many companies, especially since this is annual budget-making time.
Monthly inflation slowed in August, though less than most forecasts projected. Inflation was 8.79% y/y, and many forecasters project nearly double-digit inflation by year end. Partly due to this, and to calm the market, the Central Bank raised the benchmark rate to 7.25% – for a total 150-basis point rise under the new governor. This has evidently worked, and merits a round of applause, since we also saw a jump in the trade deficit, which could trigger more speculation against the rupiah. Therefore, current stability should be seen as a blessing, and help economic activity return to a more sustainable path.

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