OREANDA-NEWS. April 02, 2015. Indonesia, a net commodity exporter, emerged as one of the casualties of falling commodity prices, which could affect the country’s growth rate.

Earlier, fuel subsidy reform paved the way for the revised 2015 Budget, allowing allocations of vital resources towards development priorities, especially capital expenditures, which are forecasted to double compared with 2014’s.

Revenue is forecasted at almost 15% higher in the 2015 budget, and capital expenditure is earmarked at double 2014 spending. However, President Joko’s target expenditures may fall short – in the latest quarterly report, the World Bank projected oil and gas revenues to fall by 57% from a year earlier which will hamper revenue collection.

Falling commodities prices will constrain Indonesia’s ability to splurge on much-needed infrastructure development, according to the World Bank’s Indonesia Economic Quarterly, March 2015: High Expectations report.

Due to its strong dependency on commodities, Indonesia’s economy continues to face headwinds from lower global commodity demand, notably from China, which resulted in a moderation in GDP growth to 5.0% last year.

The World Bank expects GDP to accelerate modestly, at an average of 5.5% through 2016, led by a pick-up in fixed investment growth and helped by rising infrastructure spending (albeit short of targeted levels). Exports are expected to stage a slow recovery but with investment also pushing up imports, net exports are not expected in the base case to be a major growth driver.

The Worst is Over for Rupiah?

On 18 March,  the Fed Chair Janet Yellen announced the US central bank will refrain from raising the US interest rate as the country’s inflation figure is still tame with US economic growth somewhat moderated and that an interest rate hike is unlikely to occur at the next FOMC meeting in April.

The move gave emerging markets currencies a much needed breather. On the same day, the Indonesian rupiah appreciated 0.55% against the US dollar, data from Bloomberg showed.

Performance of Indonesian Rupiah

Source: Bloomberg

Bank Indonesia (BI)’s decision to maintain its key interest rate at 7.50% (after having made surprise 25 basis points cut in the previous month) earlier helped to provide a measure of support for the Rupiah.  It also signalled that BI does now want the currency to depreciate too much and this provided near-term support for the rupiah.

“The level of the rate is consistent with its efforts to contain inflation and the current account deficit,” said BI. BI believes that rupiah weakness is driven more by the US dollar strength, and it will continue to beef up measures to keep the rupiah stable.

Indonesia Trade Balance

Source: Bloomberg

Meanwhile, the Indonesian government is aiming to implement several reforms that will support the economy and the currency. Specifically, it is targeting to boost exports while limiting imports in a move to improve the current account balance. In February, the country’s trade balance swung to a surplus of US\\$738.3 million aided by non-oil exports.

Measures that have been mooted included waiving value-added tax for shipbuilders as well as other strategic industries, imposing temporary anti-dumping taxes, increasing the mandatory biofuel content in diesel to 15%, providing tax allowances to export-oriented companies, expanding visa-free short-term visits to citizens of 30 new countries, and requiring all commodity exporters to accept letters of credit (L/C) only in selling their goods.

Counter-Rally

The single most important global macro variable that has been impacting EM negatively is the US dollar, due to translation and leverage impacts on earnings, said Morgan Stanley in the report, “Dovish Fed – Expect counter-trend rally in EM equities and brief pause in Japan's bull run.”

Now that the upward surge of the US dollar is stalling, emerging market equities – particularly the laggards this year, such as ASEAN can attract a counter-trend rally for a while, added the investment bank.

Performance of MSCI Indonesia Index

Source: Bloomberg

The MSCI Indonesia IndexSM since August 2014 had, in conjunction with other Asian equities, edged higher. However, the surge in returns was much reduced if we take into account the falling rupiah.

SGX MSCI Indonesia IndexSM Futures

The most recent roll of the SGX MSCI Indonesia Index Futures from the March 2015 contract to the April 2015 contract reflects investors’ long-term view of the Indonesia market, with the vast majority of March positions re-establishing in the April 2015 contract. As of the last trading day (30 March 2015), 89.2% of March 2015 contracts rolled into April 2015 contracts (versus the one year historical average of 77.5%).

Active market makers provide on-screen liquidity throughout the day at 2-3 ticks (?20-30bps) and are able to respond to quotes (RFQ) to providing block liquidity. Refer below for the contact details of market makers available to provide block quotes.