Riska Rahman, Jakarta – Foreign investors are starting to put their money back into Indonesian assets as countries around the world begin to ease their COVID-19 restrictions, spurring hopes of a global economic recovery.
Foreign investors bought a total of Rp 8 trillion (US$564.3 million) in Indonesian stocks throughout last month, Financial Services Authority (OJK) data show. In the past week alone, they bought Rp 3.39 trillion stocks more than they sold. Indonesia's sovereign debt market also saw an influx of foreign money last month as the OJK recorded net foreign buys of Rp 7.07 trillion in May.
The capital inflows boosted the rupiah 8.7 percent in the past month, reaching Rp 13,877 per United States dollar on Friday afternoon. The Jakarta Composite Index (JCI) benchmark stock gauge gained nearly 5 percent within a month. The 10-year sovereign bond yield also declined significantly to 7.1 percent from 8.02 percent in early May, indicating a decline in risk in investing in the instrument, as bond yields move in the opposite direction of stock prices.
"The global market is seeing an abundance of liquidity because central banks in developed countries have been injecting money to support their economies during the COVID-19 pandemic crisis," BNI Sekuritas economist Damhuri Nasution told The Jakarta Post.
The capital inflow is therefore caused mainly by external sentiment, he added.
As the coronavirus outbreak takes its toll on the economy, the US Federal Reserve pledged in March that it would conduct large-scale purchases of Treasuries and mortgage-backed securities with an open-ended commitment as a way to pump more money into the economy, Reuters reported.
The European Central Bank (ECB) also launched in March its Pandemic Emergency Purchase Programme (PEPP), which has an overall fund of 750 billion euros, until the end of 2020. The money will be used to buy private and public sector securities to counter the economic impact of the COVID-19 pandemic.
Investors, however, did not quickly jump at the chance of investing in high-yielding assets such as those in Indonesia following the pump from central banks, as many countries imposed mobility restrictions that brought their economies to a standstill in a bid to stop the spread of the coronavirus. Investors have regained their optimism, however, as several countries like Italy and Australia relaxed their lockdown measures, said Damhuri.
"The relaxing of mobility restrictions is sparking optimism among investors that the coronavirus is under control and that the global economy is starting to emerge back to normal," he added.
Such optimism has sent foreign investors on a buying spree of Indonesian blue-chip banking stocks such as Bank Rakyat Indonesia (BRI), Bank Central Asia (BCA) and Bank Mandiri during the past week, driving up the JCI gains.
The buying spree was caused by the fact that investors started to lower their risk perception of Indonesia's economy even though the country has yet to fully open its economy, Trimegah economist Fakhrul Fulvian told the Post.
The government's plan to reopen some regions that are deemed safe could engender positive sentiment in the country's capital market, said Fakhrul. Several "red zone" regions including Jakarta and West Java have continued their large-scale social restrictions (PSBB) as the numbers of confirmed coronavirus cases remain high.
Damhuri warned that the government should keep a close eye on how the PSBB relaxation could also pose a threat and reverse the positive sentiment in the market.
"If the people are not disciplined, we could face a second wave of the outbreak that could lead to another PSBB in the future like what happened in South Korea," he said.
South Korea recently re-implemented strict lockdown measures in the capital Seoul until June 14 following a spike in new coronavirus cases after it allowed bars and restaurants to reopen.
Damhuri went on to say that the government should conduct a thorough consideration before easing the restrictions to minimize the possibility of a second wave.
Meanwhile, Fakhrul suggested the government reduce the country's current account deficit (CAD) to help stabilize the economy and maintain the positive investor sentiment in the long term.
Bank Indonesia (BI) recorded a CAD of US$3.9 billion, 1.4 percent of gross domestic product (GDP) in the first quarter of this year, down from 2.8 percent of GDP in the previous quarter. The narrowing deficit was caused by falling imports and a dwindling deficit in services as a result of the pandemic.