Indonesia Stocks Fall 20% From Peak as Outflows Spur Rupiah Drop

Indonesia Stocks Fall 20% From Peak as Outflows Spur Rupiah Drop

By arry Suhartono & Yudith Ho on 2:45 pm August 20, 2013.
Indonesian stocks headed for the biggest four-day plunge since 2008, sending the benchmark index down more than 20 percent from its peak, amid growing concern that capital outflows will accelerate. The rupiah tumbled. The Jakarta Composite Index declined 5 percent to 4,097.18 as of 11:36 a.m. local time, extending its four-day slide to 13 percent. The gauge has dropped 21 percent from its record closing high on May 20. The rupiah fell 2 percent to 10,704 per dollar, the weakest level since April 2009, prices from local banks show.The cost to insure Indonesian debt against default surged to an almost two-year high on Monday, according to CMA.

The nation’s shares have tumbled at the fastest pace worldwide this quarter amid concern the quickest inflation in four years will spur the central bank to tighten monetary policy further after it raised the benchmark interest rate in June and July.

The Jakarta index sank 5.6 percent on Tuesday as data showed the country had a record current-account deficit last quarter.

Speculation that the US Federal Reserve will soon withdraw stimulus has also fueled the retreat. “We are in bear-market territory,” said Priyo Santoso, chief investment officer at Mandiri Manajemen Investasi in Jakarta. “We have been defensive in our strategy in the past few days.”

Foreign Outflows

Overseas investors have pulled $255 million from local stocks in the past two days, exchange data compiled by Bloomberg show.

Bank Mandiri and Unilever Indonesia were among the biggest drags on the stock index on Tuesday as trading volumes climbed to 73 percent above the 30-day average.

The rupiah headed for the biggest drop since September 2011.

Five-year credit-default swaps insuring the Southeast Asian nation’s debt against default rose 43 basis points to 283 on Tuesday, according to CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market.

Inflation reached 8.6 percent in July, the fastest pace since February 2009.

The current-account deficit swelled to $9.8 billion in the second quarter, the most in data compiled by Bloomberg going back to 1989, the central bank reported on Aug. 16.

The shortfall will narrow in the current three-month period, Finance Minister Chatib Basri told reporters after the market closed on Tuesday.

‘Selling Pressure’

“The government hasn’t been able to restore confidence in the market,” said Norico Gaman, the head of research at BNI Securities in Jakarta.

“Investors now put more weighting on the risk that they have to take, no longer at the potential returns that they might have. Their main concerns right now are inflation and the exchange rate.”

The rupiah spot rate has dropped 7.3 percent against the dollar this quarter, the worst performance among Asia’s 11 most-traded currencies.

A fixing by the Association of Banks in Singapore used to settle derivative contracts was set at 10,699 on Tuesday, the weakest since April 2009.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 109 basis points, or 1.09 percentage points, to 14.68 percent, according to data compiled by Bloomberg.

The yield on the nation’s bonds due May 2023 rose one basis point to 8.38 percent, prices from the Inter Dealer Market Association show.

It reached 8.41 percent on Monday, the highest level since March 2011.

The Fed will start tapering its monthly bond purchases in September, according to 65 percent of analysts surveyed by Bloomberg this month. “The rupiah will still be under selling pressure due to global sentiment, along with local assets,” said Mika Martumpal, head of treasury research and strategy at Bank CIMB Niaga in Jakarta.

“Risk indication surged following disappointment over Bank Indonesia refraining from raising rates to support the currency and attract inflows.”