Indonesia has been given breathing room to implement reforms and prepare for a tighter liquidity environment after the US Federal Reserve central bank said it was in no rush to raise its interest rate, a policy expected to give medium-term stability to global financial markets.
The rupiah strengthened to 12,980 per US dollar level, while the Jakarta Composite Index (JCI) surged by 0.75 percent after US Fed chairwoman Janet Yellen announced a US interest-rate hike was unlikely to occur in the short-run.
"The Fed's decision gave Indonesia something to cheer about. The country will now have a longer time to prepare itself and implement the structural reforms ahead of the financial shocks that could occur from US monetary policy tightening," Bank Indonesia (BI) spokesman Peter Jacobs said on Thursday.
A two-day Federal Open Market Committee (FOMC) meeting ending on Wednesday (Thursday Jakarta time) concluded with a lowering in the median estimate of the year-end US interest rate to 0.625 percent. In a meeting three months ago, the figure stood at 1.125 percent. Following the statement, money-market futures traders set the odds of a rate increase below 50 percent until December, Bloomberg reported. Only 11 percent predicted that the Fed would increase the rate in June.
The latest rupiah appreciation would be "good" for the Indonesian economy, Peter noted, deviated from previous BI statements that campaigned for a weaker currency to boost the country's exports. On Thursday, the rupiah appreciated to 12,980 per dollar in the morning before trading at 13,008 against the greenback at 10 a.m., according to the Jakarta Interbank Spot Dollar Rate (JISDOR). The rupiah has fallen by some 6 percent this year to lead losses in Asia.
Morgan Stanley recently struck the rupiah and the Indian rupee from its list of "Fragile Five" currencies most vulnerable to capital outflows, arguing the Indonesian government and BI had implemented potentially notable economic reforms.
The US-based investment bank predicted that the latest Fed statement could attract stronger inflows to emerging markets, including Indonesia. "The single most important global macro variable that has been impacting emerging markets negatively is the US dollar," a team of Morgan Stanley analysts wrote in a research note released Thursday.
"To the extent the US dollar now has a counter-trend rally, emerging markets' equities – particularly the laggards this year such as Europe, Mideast, Africa, Latin America and ASEAN – can attract a counter-trend rally for a while," they wrote.
In the Indonesian equity market, the JCI rose 0.75 percent to close at 5,453 on Thursday. Foreign investors reentered the market with a net buy of Rp 490.1 billion (US$37.5 million), reversing a Rp 405.5 billion net sell a day earlier.
The benchmark index in Indonesia has rallied 4.3 percent this year, but the surge was relatively minor compared to the 8 percent in the Philippines, 10.7 percent in China and 11.6 percent in Japan, as investors have begun to doubt the leadership and economic reform capabilities of President Joko "Jokowi" Widodo's administration.
So far, Jokowi's economic policy package to support the rupiah, which includes a set of fiscal incentives including tax allowances, import duties and a visa-waiver policy has received few cheers from investors.
Analysts have warned policymakers not to get lulled by the temporary respite and underestimate the risk from monetary tightening, recommending the implementation of stronger economic reforms.
We expect the return of investors' fear that the US FOMC will start raising its benchmark Fed Funds Rate later this year will hurt the rupiah and Indonesian equities," John D. Rachmat, the head of equity research at Mandiri Sekuritas, said. John, who downgraded his year-end outlook for the JCI from 6,350 to 5,450 due to external and domestic risks, had told investors in response to the recent rally in Indonesian equities: "Enjoy it while it lasts."