OREANDA-NEWS. July 22, 2015.

Indonesia Faces Growth Headwinds

As commodity prices tanked, Indonesia’s growth continued to slip. In the first quarter, the economy expanded 4.7% from the year-ago period, below the 4.9% consensus estimate in a Reuters poll. It was the slowest pace since 2009, during the Global Financial Crisis.

The Asian Development Bank (ADB) revised down its projection of Indonesia’s economic growth this year to 5% from the previous projection of 5.5%.

Source: Bloomberg 

The government would increase spending and attract more foreign direct investments to the country, said Indonesian President Joko Widodo on 9 July in an address.

In addition, infrastructure development will be a long-term strategy for the reform, he added.

However, doubts lingered as to whether the proposed spending in infrastructure could be ramped-up.

As of 9 July, the Finance Ministry confirmed that capital expenditure during the first six months was less than 10% of the total budgeted for the whole year.

It is mostly politics, rather than macroeconomic problems, that caused Indonesia’s economy to underperform, remarked Piyush Gupta, the CEO of Southeast Asia’s largest bank, DBS.

The political noise resulting from the rivalry between the coalition government and the opposition camp at the House of Representatives tended to hinder the government’s reform initiatives, he added at a regional media briefing held on the sidelines of the two-day DBS Asian Insights Conference in July. “The agenda of the new government was well thought out and the expanded fiscal space allows for bigger investment spending. But unfortunately, all those good projects have yet to be put on stream,”

These political hurdles are addressed by Indonesian President Joko Widodo as he inches towards a cabinet re-shuffle.

Bank Indonesia Left Rates Unchanged

As expected, Bank Indonesia (BI) kept its benchmark reference interest rate (BI rate) unchanged at 7.50% on 14 July.

Similarly, the overnight deposit facility (FASBI) rate was kept steady at 5.50%.

An appreciating US dollar coupled with domestic inflation has kept BI on a tight leash, rendering the central bank incapable of stimulating the economy.

“Despite the growth slowdown, we believe that BI has little room to cut its interest rates further in the short-term until the inflation eases in 4Q15 wrote UOB in a research note. “While there remains risk of a 25-50 bps interest rate cut in the fourth quarter, we are of the view that IDR weakness could continue to keep BI’s hands tied. The USD/IDR is likely to trade firmer as we head into the eventual rate lift-off in the US which is expected in the later part of the year.”

Source: Bloomberg

Unlike Japan, Indonesia is dependent on commodities for exports. Hence, a weakening rupiah has failed to ignited exports. Instead falling commodity demand from China pushed Indonesia’s exports lower.

Further weakening of the rupiah could also lead to inflation problem for the government.

SGX MSCI Indonesia IndexSM Futures

The MSCI Indonesia Index has fallen below its 30, 50 and 100 day moving averages.

Source: Bloomberg

The SGX MSCI Indonesia futures  is the only offshore listed futures contract based on the Indonesian equity market. The USD denominated SGX MSCI Indonesia futures contract is an effective hedging and access tool for customers to invest in Indonesia’s growth without the risk of currency fluctuations. Investors who wish to maintain their Indonesian holdings may choose to short equity index futures to take advantage of short term volatility without unwinding their stock portfolio.

The futures contract provides an alternative and complementary tool to Indonesia ETFs. In comparison to the top three global ETFs by size that track Indonesia ETFs, the SGX futures contract has around 40% volumes market share and 10% open interest market share.

For more information on the SGX MSCI Indonesia Index Futures, please follow this link.