Editorial: Let skittish investors go

The meltdown that started last Friday on the Asian stock markets continued during the first two days of this week, though at a slower rate. The markets in the United States and Europe were also in an economic bloodbath on Monday as investors were increasingly concerned about a possible global recession, after Standard & Poor’s (S downgrading of the US’ credit rating from AAA to AA+.

The Jakarta Composite Index, which tumbled by 5 percent last Friday, fell another 5 percent during morning trading on Monday, before recovering in the afternoon to close that day with a drop of less than 2 percent, the level of the average fall suffered by the Asian market.

JCI lost nearly 3 percent on Tuesday.

This rout was not a complete surprise because of the increasing integration of the global financial market. The market also usually tends to overreact to a negative development, as it did last Friday and early this week.

Still, the impact seemed to be inordinately excessive because the difference between AAA and AA+ rating is actually not so big, with the former being classified as “prime” and the latter as “high grade”. Put another way, in case of AAA bonds, the likelihood of getting repaid is extremely strong, while under a AA+ rating, the probability of repayment is very strong.

The two other major ratings agencies, Moody’s and Fitch, last week still affirmed their top rating of US debt albeit with a negative outlook.

What made the impact rather shocking is the fact that it was the first ever downgrade of the US sovereign credit rating; a dreaded thing that was unthinkable before, in view of the US’ status as the world’s largest economy and printer of the world’s reserve currency.

However, the global economic outlook could worsen leading to the brink of recession if the US government remains politically complacent regarding its fiscal management, and the Federal Reserve Bank does nothing to help stimulate the economy. In which case, the two other rating agencies would eventually support S&P’s verdict.

There was a respite, though, when banking regulators emphasized that the downgrade would not affect the risk-based capital requirements for US banks, limiting the potential fallout for thousands of commercial banks and savings institutions.

Neither will S&P’s downgrade directly impact short-term obligations, which are the focus of money funds’ mandates, unless ratings firms decide to downgrade short-term debt.

Most analysts rightly ruled out an adverse impact on Indonesia by the US credit rating downgrade, as the economy is quite resilient and Bank Indonesia, which has been closely monitoring the situation, has repeatedly assured the market it will act firmly and quickly to maintain stability.

In fact, as our economic fundamentals remain strong, with government 10-year bond yields relatively high at about 6.80 percent (compared to 2.5 percent returns on US Treasuries), and concerns over European debt woes still lingering, Indonesia will likely become more attractive to overseas portfolio capital.

We may see another panicked overreaction given the high volatility in the financial market, but the correction should only last for the next few days.

But then, if skittish foreign investors continue to unload Indonesian stocks, let them go. That would be a good opportunity for domestic investors to start buying, notably the shares of resource-based companies and those which do not depend largely on the international market.