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24 Agustus 2021

Economic Weekly Series - August 23, 2021

Fed Tapering: This Time would be Different for Indonesia

 

Plans on Fed Tapering Drives Market Sentiment

On August 18-19, policy meeting Bank Indonesia (BI) decided to keep its 7-day reverse repo rate unchanged, in line with market expectation. However the value of Indonesian rupiah depreciated against USD and domestic equity market tumbled, meanwhile the 10 year Indo GB yield stayed flat. This time, market sentiment is largely driven by the Fed’s plan to taper asset purchases that began more than a year ago. The Fed officials debated mainly on the timing of when to start adjusting the pace of asset purchases.

 

Rationale for Fed Tapering

 

The policymakers did not reach consensus as reflected in minutes of meeting. Views were splitted up. Some argued that the first step to roll back the stimulus needs to be taken by the end of this year. Some are supporting the idea to adjust in early 2022. Despite ongoing concern on Delta variant widespread across U.S. and globally, persistent high inflation and solid job market have opened the room for taper discussion among policymakers.

 

2013 Fed Tapering Impact to Indonesia

In 2013, markets reacted negatively on Bernanke’s tapering announcement. USD strengthened and as a consequence EM currencies value were depreciated. Tapering announcement also triggered equity market sell off in EM. Indonesia was no exception at that time. Only in a matter of month JCI market capitalization dropped by 18% from its highest level. The benchmark 10 year Indo GB yield rose more than 330 bps in a year. Rupiah that was negatively affected by widening current account deficit was extremely vulnerable. Rupiah depreciated by 26.5% in that year and continued its downtrend declining more than 50% September-15.

 

Why the Fed Tapering would be Different this Time?

 

This time we expect a different story for Indonesia. We believe the impact of tapering off would be insignificant and only lasting temporarily. Both external and internal factors play a role.

From the external factors clear guidance and communication from the Fed has helped market to better understand the policy framework. In addition a structural change in domestic financial assets, attractive asset valuation, better macro data, as well better equipped policy makers have increased our confident, that this time Indonesia would be more resilient. Now investors needs to keep an eye on the Fed guidance, prior to tapering investors can rebalance their portfolio to a less volatile and impacted assets. Should the correction occur during taper announcement it would be great opportunity for buying this time.

 

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