The economists expect the Bank Indonesia to maintain the seven days repo rate at 4 percent. - Photo: Privacy

JAKARTA (TheInsiderStories) – Good Morning. Board of governor Bank Indonesia (BI) meeting become investors attention today. After cancelled its decision last week, today the board will announce the central bank’s monetary decision today.

Yesterday, Rupiah in the spot market touched its lowest level during this year at Rp14,394 against U.S dollar, or shedding 1.52 percent compared to previous day. Beside Rupiah, almost all major currencies and emerging markets weakened against the dollar on Thursday (28/6).

Several economist says, the weakening of the local currency was triggered by the strengthening of the US dollar. In addition, the weakening of the rupiah also occurred in line with the rising yield of government securities.

On Thursday the yield on 10-year’s government bond benchmark stood at 7.86 percent or up 1.69 percent. This makes foreign investors choose to withdraw funds from the domestic market.

The rupiah continued to weaken because of the depressed data of Indonesia’s trade balance in May which was released with high import figures. Investors also began to keep a distance with the domestic market in line with the event of a political year that is getting closer.

According to analyst from Monex Investindo Faisyal, during the regional election until the next presidential election is potential for uncertainty in the Indonesian market. Until the end of this year, he said, the rupiah potentially continues to weaken in the range of Rp 14,500 – Rp 15,000 against the greenback.

The reason, U.S’s Federal Reserves (Fed) is likely to raise its benchmark rates for twice more in this year. In addition, in August, the presidential candidate will announce and more uncertainty starts to emerge.

In his prediction, investors focus on the results of BI’s Governors Meeting. He saw, the rupiah will continue to weaken and potentially test the level of Rp 14,500 per U.S dollar on today’s trading.

Bank Permata Economist Josua Pardede believed, the central bank is expected to maintain Indonesia’s macroeconomic stability in particular on the stability of the rupiah in the short term and will consider a pre-emptive policy in response to the latest development of U.S interest rates.

He urged, the strengthening of the U.S dollar is still driven by expectations of normalization of monetary policy of the Fed and the lack of issues of trade war between the United States and China. Concerns over the issue of trade war have encouraged a weakening of the Chinese Yuan that has continued impacts on most Asian currencies, said Pardede.

To lowered the pressures on Rupiah in the short term, BI is expected to tighten its monetary policy by considering the widening current account deficit in 2018 to 2.2-2.3 percent of gross domestic product. This is indicated by the development of the trade balance which reached a deficit of $2.8 billion during January-May 2018, he added.

On May, international credit rating agency Fitch Ratings has warned that the recent depreciation of the rupiah may add pressure to developers in Indonesia which have a large portion of loans denominated in U.S dollar and already face slowing property demand.

The Rupiah is the second worst performing currency in Asia in the last four months and broke through Rp14,200 per U.S dollar, a level not seen since December 2015. In the short term, Fitch said, this will affect Indonesian homebuilders as their interest and capital payments will increase in local-currency terms.

Each of the Fitch-rated developers has 50 percent or more of their borrowings in U.S dollars as dollar-denominated bonds are traditionally more attractive because they have a broader investor base and are cheaper than bank loans or domestic bonds.

Fitch also believes that the currency depreciation may also lead buyers to hold off big-ticket purchases; on top uncertainties around the presidential election in 2019. Consequently this may result in lower-than-expected presales and associated cash flows.

The rupiah’s depreciation will also have limited impact on rated developers’ leverage profiles. Should the rupiah weaken to around 15,000 to the U.S dollar, leverage for Fitch’s rated developers will increase by between 2 per cent and 6 per cent, which leaves leverage broadly inline with the rating guidelines.

PT Lippo Karawaci Tbk (IDX: LPKR) would be most vulnerable among Fitch-rated Indonesian homebuilders to a persistent rupiah weakness. It has negligible U.S dollar cash inflows and its annual coupon payments exceed the dollar cash balance it maintains.

As of Dec. 31, 2017 it reported only $13 million cash reserves versus an annual coupon payment of around $65 million. The situation is particularly acute because it has limited operating cash flows to service its interest payments and rent, barring planned asset sales.

PT Alam Sutera Realty Tbk (IDX: ASRI) is the next worst affected, with negligible US dollar cash inflows and its annual coupon payments also exceed the dollar cash balance it maintains. As of Dec. 13, 2017 it reported only $8 million in cash versus an annual coupon payment of around $33 million. Fitch, however, notes that ASRI has fully hedged the principal of the dollar bonds, which limits its exposure only to the coupon payments.

PT Bumi Serpong Damai Tbk (IDX: BSDE) would also be at a disadvantage as it has not entered into any hedging contracts for its U.S dollar notes. BSDE only had $29 million in cash at end-2017 against $42 million annual coupon payments, including the recently issued $300 million 7.25 per cent notes.

The risks for BSDE are mitigated by the company’s comfortable margin cushions, discretionary land acquisitions, and well-laddered debt maturity, which will allow BSDE to conserve cash amid increased pressure on cash flows from the rupiah depreciation.

PT Pakuwon Jati Tbk (IDX: PWON) and PT Ciputra Development Tbk (IDX:CTRA), are likely the most resilient in the face of a weakening rupiah among its peers. This is because PWON fully hedged the principal of its $250 million bonds with upper strike price of up to Rp16,500 per U.S dollar and it maintains sufficient cash in dollars to cover the annual coupon payments.

Similarly, CTRA has hedged the principal on its Singapore dollar bonds with upper strike price of up to Rp12,525 per Singapore dollar, and therefore limits exposure mainly to the coupon payments. As of end-2017 CTRA reported a cash balance of $16 million against annual coupon payments of around SGD8 million.

Fitch believes the U.S dollar exposures for PT Agung Podomoro Land Tbk (IDX:APLN), PT Kawasan Industri Jababeka (IDX:KIJA) and PT Modernland Realty Tbk (IDX:MDLN) are manageable as they have sufficient cash in US dollars to cover annual coupon payments and they have hedges in place for a substantial part of their outstanding dollar bonds.

Well, the tightening of monetary policy by BI is needed to maintain macroeconomic stability in the short term which is expected to withstand the release of foreign funds from the domestic financial market.

Until this week, foreign investors booked a net sales of $3.8 billion in both the stock and bond markets, while optimizing the policy mix by loosening macro-prudential policy that is expected to continue to boost demand for bank credit especially consumer credit, said Pardede.

Meanwhile, Bank Central Asia economist David Sumual said Indonesia’s current economic condition is vulnerable to the strengthening of the U.S dollar, a consequence of commodity imports and de-industrialization in the past decade. For us, the possibility of BI hoisting the benchmark rate for the third time at the current Board of Governors Meeting will not have much impact.