Aloysius Unditu – Indonesia's rupiah and bond markets remained under selling pressure this week as investors dumped local high-yield assets ahead of next month's scheduled subsidized fuel price increase.
Economists, bond traders and foreign exchange dealers in Jakarta said the outlook of the two markets for the coming weeks was bleak.
"Uncertainty remains high and will remain so in the coming days," said David Sumual, an economist at Bank Central Asia in Jakarta. "That would dampen market sentiment on the bond and rupiah market." The government has proposed increasing the subsidized fuel price in April to Rp 6,000 a liter from Rp 4,500.
The plan still needs approval from lawmakers, and speculation has abounded that it might not happen, creating uncertainty for investors.
"There is talk in the market that the planned fuel price increase will be scrapped or postponed," said a fixed-income dealer at a Jakarta bank who declined to be identified. The dealer added that political opposition to plan suggested it might not be put into effect until more debates were held to discuss its merits.
The Prosperous Justice Party (PKS) and the Indonesia Democratic Party of Struggle (PDI-P) have voiced their opposition to the subsidy cut, while the Golkar Party and the Democratic Party support the plan.
The yield of the government's 10-year bond rose to 6.0685 percent on Friday from 6 percent the previous day while the 15-year bonds increased to 6.607 percent from 6.529 percent, according to data from Indonesia Bond Pricing Agency. Bond yields move inversely with bond price.
As of March 9, foreign holdings of Indonesian bonds had fallen to Rp 226 trillion ($24.8 billion) from Rp 236 trillion in early January. Almost $1 billion worth of funds have been pulled out of Indonesia in the last one and a half months alone.
The capital outflow led to a decline in the rupiah in recent weeks. On Friday it gained ground slightly to trade at 9,178 against the dollar, compared with Thursday's close of 9,193, thanks in part to the central bank selling dollars. The rupiah lost 0.2 percent against the dollar across the week.
Foreign exchange dealers said the central bank's move to intervene in the foreign exchange market prevented the rupiah from sliding further on Friday.
Bank Indonesia said in a March 8 statement that it would continue to observe and intervene in the foreign exchange and bond markets to stabilize the currency.
Foreign exchange dealers said Indonesia's central bank would do whatever it could to prevent the rupiah from breaking the 9,200 level against the dollar. "That would be the resistant level," BCA's David said.
The proposed state budget assumes a rupiah that trades at 9,000 against the dollar, slightly weaker than the original forecast of Rp 8,800 per dollar. Analysts said the central bank had intervened in the foreign exchange market, selling a limited amount of dollars for rupiah.
Deputy governor Hartadi Sarwono said on Wednesday that Bank Indonesia was considering raising the statutory reserve requirement for commercial banks to contain inflationary pressures.