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Foreign funds fly to safe haven
The sell-off in the Indonesian financial market deepened on Monday as foreign investors began to move their funds to developed countries amid signs the Federal Reserve would increase its interest rates much earlier than expected
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The sell-off in the Indonesian financial market deepened on Monday as foreign investors began to move their funds to developed countries amid signs the Federal Reserve would increase its interest rates much earlier than expected.
The Indonesian benchmark bonds, due to mature in 2024, fell Monday, pushing the yield by 17 basis points to 8.7 percent, the highest level in more than a year.
The local currency and stock markets also fell, with the rupiah's non-deliverable forwards ' an offshore rate that is indicative of a currency's future value ' depreciating to 13,500 per US dollar while the Jakarta Composite Index (JCI) hit 5,014.9, its lowest level this year.
'It is more challenging to entice investors into emerging market assets when government bond returns in the developed world have become a lot more attractive over the past few months,' Eugene Leow, a fixed-income analyst with DBS Bank in Singapore, said on Monday.
'For Indonesia, external funding vulnerability remains,' he wrote in an email interview. 'This is reflected in the sensitivity of Indonesian government bond yields and the rupiah to shifts in US treasury yields.'
Expectations of tighter monetary policy in the US and Europe have pushed up their premium-rated bonds yields, making them cheaper and thus encouraging outflows from risky assets in the Asian region, economists have noted. Bonds move in the opposite direction of prices, with those with higher yields rated cheaper among investors.
In June, the yield for benchmark 10-year US Treasuries and German Bunds have risen more than 20 basis points to hit 2.39 percent and 0.85 percent, respectively, both the highest level this year. The two bonds' yields were both stable on Monday.
Higher bond yield in Europe was a 'success story' that indicated the region had overcome the threat of deflation and economic downturn, European Central Bank Governing Council member Ewald Nowotny said as quoted by Bloomberg.
In contrast to a brighter outlook in the developed nations, the Asian region has to grapple with the threat of the Chinese economic slowdown. China, the largest trading partner of Indonesia, recently announced that its exports in May fell 2.5 percent while imports tumbled 17.6 percent, signaling a bleak economic outlook in the world's second-largest economy.
'There has been prevailing pessimism in the region due to the slowdown in China, which might spill over to the Indonesian economy,' Finance Minister Bambang Brodjonegoro warned Monday in a meeting with lawmakers from House of Representatives Commission XI overseeing the economy.
In the equity market, foreign investors posted a net sell of Rp 286.5 billion (US$21.4 million) in the JCI on Monday, pushing the benchmark index to close 1.7 percent lower at 5,014.9, marking its eighth day of decline over the past nine days.
The 1.7 percent decline registered by JCI on Monday was the worst performer compared to 12 stock markets in the World Benchmark Indices compiled by the Indonesian Stock Exchange. The second-worst performer, India's S&P Sensex, fell by 0.85 percent.
The sell-off in the stocks and bonds market exerted pressures on the rupiah, which weakened by 0.5 percent to 13,360 per dollar on Monday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR), or to 13,385, according data compiled by Bloomberg.
Bank Indonesia (BI) spokesperson Tirta Segara said Monday that the central bank would intervene, but such an action would only be intended to 'smooth' the rupiah's movement in its rational value against the US dollar, not to peg it at a certain level.
'If there are parties [selling their dollars] as they bet the rupiah rate would hit 13,500 when its market value is still 13,400, then we would certainly intervene,' he said.
'But, our intervention would not go against the market because if other regional currencies from Malaysia to South Korea are weakening, then ours could not be the one strengthening alone,' he said.
