Bahana TCW Investment Management Appreciates Government's Steps to Reduce Imports

INDUSTRY.co.id - Jakarta - The financial markets of developing countries, including Indonesia, have been depressed since the beginning of this week. The two main components are the cause of the depressed market conditions in Indonesia. First, the strengthening of the United States Dollar (US) against the majority of developing country currencies. Second, the worsening sentiment towards developing countries due to the crisis of the Turkish currency, the Lira that has occurred in recent days.

Since the beginning of the year (ytd), the Rupiah has weakened by 7.59% against the United States Dollar (US). The Composite Stock Price Index (CSPI) fell 1.73%, and closed at 5,769.88, Tuesday (8/14). Meanwhile, the yield on government bonds (SUN) for the 10-year reference series has broken the psychological level of 8%.

Budi Hikmat, Strategy Director and Macro Economic Head of PT Bahana TCW Investment Management, said that the impact of the Turkish currency crisis on the Indonesian economy was relatively limited. Because, so far Indonesian banks have no exposure to Turkish securities. However, Turkey's worsening economy due to twin deficits has dragged the Indonesian capital market.

"Fundamentally, Indonesia's economy is far more prudent than other countries. We are far from an overheated situation, where slower credit growth in the second quarter inflation rate is still maintained, "Said Budi Hikmat, in a press release on Wednesday (08/15/2018).

In comparison, Indonesia's economic condition is far from overheated compared to Turkey. Fundamentally, Turkey's economic management is currently unhealthy and the worsening of twin deficits is estimated at around 9% of GDP, which, based on Bloomberg data, projected a current account deficit (CAD) around 6.4% at the end of the year. In addition, the political conditions with the President of the United States further exacerbated the situation. The exchange rate of the Lira against the US Dollar has dropped 70.99%, the yield of Turkish government bonds has increased by 22% throughout the year.

Meanwhile, Indonesia's economic fundamentals are still quite good, where Indonesia's current account deficit (CAD) in the 2-2018 quarter is 3% of Gross Domestic Growth (GDP). Indonesia's inflation rate was also much lower, namely 3.2% compared to Turkey's inflation rate of 15.9%. Indonesia's unemployment rate is 5.1%, while Turkey is 10.5%.

However, Budi reminded that the Indonesian government must be careful with the current account deficit which has exceeded 3% of GDP. "This is an alarm for Indonesia, in order to re-activate the foreign currency drilling machine. If not, CAD will continue to be depressed, "said Budi.

Currently, Budi continued, Indonesia is still dependent on exports of commodities such as coal and oil and gas. While non-oil and gas exports fell amid rising prices for imports of raw materials and capital goods. Meanwhile, there is a deficit in the oil and gas sector due to oil and gas imports as global oil prices raise and oil demand is higher during Eid and school holidays.

Meanwhile, to reduce the current account deficit, the Indonesian government this week announced a number of measures to control imports, both in consumer goods, raw materials and capital goods. Bahana TCW Investment Management appreciates the steps taken by the government to improve the balance of payments.

"The government must accelerate efforts to take advantage of the strengthening of the dollar and rising oil energy prices both through energy substitution policies (B20 biodiesel) and spurring tourism and manufacturing that can generate foreign exchange for the country," said Budi.

Regarding the Board of Governors' Meeting which took place today, Budi suggested that the central bank would not need to raise the BI-7 Days Reverse Repo Rate this time. "Real interest rates have been positive while credit growth has not met expectations. "The weakening of the Rupiah was caused more by oil imports which reached 18.6% yoy from January to May this year," he explained