JAKARTA (TheInsiderStories) – The Jakarta Composite Index (JCI) closed down 0.42 per cent to 6,615.47 points in the first session on Thursday (22/02), pressured by the news of likely increase of the Federal Reserve’s (Fed’s) interest rate this year.
The shares trading in the first session was highlighted by the weakening of the majority of sectors led by the decline of miscellaneous industry sector by 0.82 per cent, followed by the weakening of the trading sector by 0.58 per cent and financial sector by 0.75 per cent.
The Fed did not raise its benchmark interest rate at the meeting on Jan. 30 and 31, but the account reinforced investor expectations the Fed would raise rates at its next meeting in March.
Fed officials have upgraded their economic outlooks since the beginning of the year and listed three main reasons: The strength of recent economic data, accommodative financial conditions and the expected impact of the US$1.5 trillion tax cut that took effect in January.
“The effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,” said the meeting account, which the Fed published Wednesday after a standard three-week delay.
The Fed is seeking to raise rates gradually to maintain control of inflation without impeding an economic expansion that is nearing the end of its ninth year, one of the longest stretches of continuous economic growth in American history.
A potential new US interest rate hike alone has pushed US bond yields. As of today, 10-year US Treasury bond yields have reached 2.94 per cent and the market is likely to be prepared to welcome yields in range 3 per cent.
Difference or spread between the yield of US bonds with Indonesia is increasingly narrowed. Currently, Indonesia’s global bond yields are in the range of 4.24 per cent. With this small margin, the potential reversal of capital flows (capital reversal) becomes more real and potentially will give pressure to Indonesian rupiah.
When a capital reversal occurs, it will threaten capital and financial transactions that are a component of the balance of payments.
Fortunately, Indonesia’s balance of payments surplus rose to $11.6 billion in full-year 2017 on the back of an increasing surplus in the capital and financial accounts (thanks to rising direct investment and portfolio investment as investors are increasingly positive about the prospects of Indonesia).
The balance of payments surplus in full-year 2017 was lower than the surplus of $12.1 billion in the preceding year, but is still a good result, especially considering Indonesia’s balance of payments had a deficit of $1 billion in 2015.
Those are some of the risks that could happen to Indonesia when US interest rates rise. It is better for the government, the central bank, and all economic actors to prepare for mitigation to avoid the worst possible.