APSN Banner

Indonesia copies financial crisis playbook to quell market rout

Bloomberg News - March 11, 2020

Tassia Sipahutar and Fathiya Dahrul – Indonesia is reintroducing a raft of market measures deployed during the global financial crisis as authorities warn the impact of the novel coronavirus outbreak on the markets and the economy will be more damaging.

The nation's only stock exchange tightened trading-halt rules on Tuesday, with the first suspension kicking in with a 5% slump instead of 10% earlier. The new rules add to limit on daily stock-price movements, a ban on short selling and a waiver of shareholder approval for stock buybacks – all measures recently imposed to curb market volatility.

Foreign investors began dumping Indonesian assets with the return of risk aversion stoked by mounting concerns over the economic impact of the coronavirus. The sell-off, part of a global market rout, saw the country's stocks tumble into a bear market and its currency become Asia's worst performer in the past month. That's prompted Finance Minister Sri Mulyani Indrawati to pledge the government will use measures such as bonds buybacks deployed in 2008 and 2009 to calm jittery investors if needed.

Back in October 2008, Indonesia halted stock trading for three days, cut the limit on stock-price moves and eased buyback rules to boost investor confidence shattered by the global financial crisis. The government also bought back sovereign bonds to stem the rout.

"Covid-19 came at a time when economic growth had been slowing down across the globe, as opposed to the global financial crisis, when China's engines were still churning fast," said Wisnu Wardana, an economist at PT Bank Danamon in Jakarta. "The current situation clouds many business owners as well as investors to navigate around unchartered territories."

Indrawati and State-Owned Enterprises Minister Erick Thohir held a meeting with Bank Indonesia Governor Perry Warjiyo, Financial Services Authority Chief Wimboh Santoso and other senior officials Tuesday to coordinate efforts to safeguard the economy and the stability of the financial system. Global and national markets as well as the economy are facing turmoil due to the virus and oil war, she said in a Facebook post.

Bank Indonesia has been at the forefront of fighting the market turmoil. It has slashed interest rate, lowered banks' reserve requirement ratios and bought more than $9 billion of bonds from investors fleeing the market. Governor Warjiyo on Wednesday vowed to continue its market intervention to stabilize the currency.

Foreign funds have sold a net $2.9 billion worth of Indonesian government bonds and stocks this year as the currency lost 4.9% in the past month and the Jakarta Composite Index extended losses to about 17% this year.

Oil crash

The crash in oil prices is the latest shock for a country still heavily reliant on commodity exports. The plunge in palm oil prices following the crude slump will also hurt its export earnings and potentially disrupt its ambitious biofuels program, key to tackling the persistent current-account deficit.

With growth in Southeast Asia's largest economy set to weaken, the government has pledged to unveil a second stimulus package to support some industries. Even though the fiscal deficit is set to overshoot the official target for a second year, the government will use all fiscal instruments to cushion the impact of the virus on the economy, Indrawati said this week.

"This is the time for fiscal policy to take on more lifting to keep the economy sustained and to even boost more domestic consumer confidence," said Enrico Tanuwidjaja, an economist at PT Bank UOB Indonesia. "The government should consider to front load all of the fiscal stimulus and only moderate it later on, keeping in mind the" 3% legal limit on fiscal deficit, he said.

Source: https://www.bnnbloomberg.ca/indonesia-copies-financial-crisis-playbook-to-quell-market-rout-1.140371