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JAKARTA (TheInsiderStories) – The European Central Bank (ECB) has decided to keep its interest rate unchanged while reiterating there is a possibility it will begin tightening its monetary policy. While U.S Federal Reserves (The Fed) remain unclear on its next monetary policy.

“Thus, monetary tightening in Europe will inevitably impact Indonesia,” said Reza Priyambada, an analyst in NH Korindo, Jakarta-based securities on Monday (11/9).

Director General for budget financing and risk management at the Finance Ministry Robert Pakpahan admits that ECB monetary policy will become a significant concern for policymaker apart from The Fed.

“The U.S. policy has always had a significant impact on global financial markets, but now – especially for Indonesia – the ECB is I think, equally important,” he said.

Foreign investors now hold about $58 billion, or 39 percent of all Indonesian bonds, according to data from the Finance Ministry. Some 43 percent of the foreign-owned bonds are held by European investors, while U.S. investors own about 24 percent.

However, Agusman, Bank Indonesia spokesman, stated that the macro economic profile of Indonesia is more robust when compared to the situation 2013, when the ‘taper tantrum’ triggered a sell-off in emerging markets, including that of Indonesia.

“Indonesia’s government bond yield at 6.8 percent remains attractive, despite policy changes by the ECB,” he added.

Josua Pardede, Bank Permata economist, said the ECB and the Fed monetary policy will impact Indonesia financial markets, especially its bond market. However, the uncertainty of Fed policy currently benefits the bond market and rupiah.

“A stable macro economic environment and increasing foreign exchange reserves will also strengthen the Rupiah,” he said.

Indonesia, along with several ASEAN countries, is considered have stable financial market, as indicated from its credit default swap (CDS) position. The 5-year senior Indonesia sovereign CDS tightened by 9.63 percent (10.75 basis points).

Even though, according to Doddy Budi Waluyo, BI Executive Director of Monetary and Economic Policy, Indonesia is still one of the most favorable countries among emerging markets, due to the government’s consistent structural reform and credible fiscal policy.

In addition, an “investment grade” ratingfrom Standard and Poor’s last May also made investors more confident.

“Capital inflows as of August 31, reached $9.8 billion on a year-to-date basis, compared to the same period last year, when it reached $11.2 billion. Even though it was slowing down it has lifted our currency, which appreciated 0.97 percent against the US dollar on a year-to-date basis,” he said.

Capital inflow is expected to rebound at the end of this year, assuming there is no massive profit-taking, unlike last year: in November 2016, the U.S held their Presidential election, so there was a capital reversal. Central banks do not expect this kind of phenomenon will take place in the future.

Last week, ECB’s President Mario Draghi is expected to unveil a monetary policy in the next month, looking to be executed in early 2018. He explained that the ECB net asset purchase pace of €60 billion in the market is intended to run until the end of this year.

However, any decision still pivots on potential inflation, as ECB aims to keep it low. He said Euro area economies are accelerating more vigorously than expected.

Up until the first half of 2017, Euro area GDP growth reached 1.1 percent, so ECB adjusted the GDP growth forecast upwards, to 2.2 percent in 2017, 1.8 percent in 2018, and 1.7 percent in 2019.

Note that the ongoing economic expansion has yet to spark stronger inflation, Euro area annual inflation was 1.5 percent in August, while the ECB revised annual inflation to 1.5 percent in 2017, down slightly. They see 1.2 percent in 2018, and 1.5 percent in 2019.

Meanwhile, the Fed policy has customarily been a significant factor for Indonesia, as U.S. investors are one of the most prominent holders of Indonesian government bonds. However, the government has admitted that European investor ownership of government bonds is also significant.

Writing by Rahmat Fiansyah, Email: rahmat.fiansyah@theinsiderstories.com

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