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Monday, May 24, 2010

Capital Outflow to Continue: Market Awaits New Minister of Finance's Response

Monday, 24/05/2010 00:00 WIB
Capital Outflow to Continue: Market Awaits New Minister of Finance's Response

Irvin Avriano A.
Bisnis Indonesia

JAKARTA: The massive capital outflow pummeling the Indonesian financial market last week is projected to continue.

However, such a situation is believed to have yet led to a bearish market and the Composite Stock Index (IHSG) is still possible to rebound, thanks to the strong Indonesian economy and promising outlook of publicly listed companies' performances as shown by the Q1 performance.

Head of Research at PT Paramitra Alfa Sekuritas Pardomuan Sihombing revealed the continued capital outflow was triggered by worries about the impacts of the European debt crisis on the global economic recovery since there had not yet been any clear messages sent as to how the crisis would be resolved.

Therefore, investors were prompted to rebalance their investment. "They will still take profit-taking actions in capital markets that have huge potential gain, such as the Indonesian market," he said last weekend.

He added this week the market would await the result of the emergency meeting between US Secretary of Finance Timothy Geithner and several high officials in Europe. In Indonesia, the market would await quick responses from the central bank (BI) and newly installed Minister of Finance Agus Martowardojo.

The IHSG last week slumped twice below a psychological level of 2,800 and 2,600. Throughout last week, the index finished down by 8.23% to 2,623.22, a two-month low marking the biggest correction on regional level.

Last week, foreign investors booked IDR10.26 trillion in sales and IDR7.73 trillion in purchase. Therefore, net-sale reached IDR2.53 trillion, the year high so far. In the previous week, foreign net-sale was still at IDR955 billion.

Worries that the European crisis would impede the global economic recovery and cut export also dragged down oil price by 7.1% to US$64.09 per barrel, which is the lowest since October. Prices of sixteen plantation and mining commodities on New York exchange also slumped.

In line with this, CPO spot price on Malaysia Futures Exchange and thermal coal price at Newcastle port, Australia Indonesia's two top export commodities-fell by 6.2% and 4.3% to US$757.1 per ton US$97.8 per ton.

At the same time, the rupiah exchange rate to the US dollar slid to IDR9,281 and once even touched IDR9,363 last weekend. Nearly all regional currencies like Indian rupee, Ringgit Malaysia, and the Philippines peso were also under the same pressure.

Pardomuan, who is also Secretary General of the Indonesian Securities Analysts Association, believed the rebalancing could take longer than projected until the European and global economies found a new point of balance.

The problem was that Greece's debt payment, which in the short-term would give positive impacts, would also tighten liquidity in Europe. As a result, amid the current trend of low interest rate, economic growth would be contracted.

"During the subprime mortgage crisis, the interest rates could still be lowered. Right now, the rates can no longer be lowered since they have already been low. The European crisis can have longer impacts than the subprime one," said Pardomuan, who is also Head of Research at PT Paramitra Alfa Sekuritas.

Following the threat of global economic contraction, investors were prompted to let go og their stock portfolios in emerging markets, correcting the bourse bubble that had been created since earlier this year.

The stock market bubble was exposed by a research by the central bank (BI), which was announced on April 7. At the time, Director of the Directorate of Economic and Monetary Policy Research Perry Warjiyo disclosed the central bank could impose capital outflow ban to stabilize the market.

When Perry cited this, the index was rallying to reach a new high, followed by a stronger rupiah exchange rate to the greenback to break a psychological barrier of IDR9,000. Minister of Finance Sri Mulyani on April 17 also expressed the same worry about the rupiah appreciation.

Global threat

An analyst at PT AAA Securities Helmi Therik added the market was still seeing a threat to the global economy despite the commitment already announced by Europe. The problem was the effectiveness of the commitment would only be temporary. The market would only recover for a day before it again slumped.

For example, Helmi illustrated, Greece had paid for its due liabilities of 8.5 billion euros on May 19, but it had not fully restored market confidence in the Greek economy.

"Investors will not only be concerned about the risk of default on the emergency fund commitment, but also the consequence of the overdue bond bailout, which is every European Union country is required to lower their deficit-to-GDP ratio to less than 3% in three years."

This, he added, would lead to the surging cost of economic activity decline to minimize deficit. The economic growth-supporting fiscal stimuli would be scaled down, prompting declining economic activities in Europe.

On the other hand, the cost of European crisis settlement would also burden the monetary instrument as much as it had burdened the fiscal one. The European Central Bank (ECB) was potential to buy the toxic debt instrument, which would increase the amount of outstanding euro money.

Commenting on the situation, Chairperson of the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) Ahmad Fuad Rahmany argued in an unsteady market a small pop could create a big bang, especially in the global capital market.

Besides, the impact and time of Greece debt crisis settlement could not yet be projected. "However, I think the correction yesterday was more attributable to a decline of 3.6% in the Dow Jones bourse."

Suhendra Wahid, an analyst at PT Trust Securities, viewed a decrease of 10% in the IHSG was a technical cycle. Indications of the bearish market would be looming if the index was corrected by more than 20%. "On the other hand, correction will instead create new opportunities to enter the market."

Meanwhile, in his research an analyst at CLSA Asia Pacific Markets Nicholas Cashmore viewed corrections in the Indonesian stock market were late since the market had booked dramatic positive performance over the past 15 months.

Based on the profits realized during the period, the IHSG could drop to a psychological level of 2,500. "The average profit-taking action over the past 200 days can drag down the index to 2,550," he said.

Strategically speaking, however, the Indonesian bourse would still be attractive, thanks to favorable climate and high gain. The favorable climate was shown by controllable debt, declining cost of capital, demand for commodity rally, and declining manufacturing product prices. (Bisnis/ags/bsi/luz/iaa)

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