Foreign Capital Accelerates Inflow into Indonesian Capital Market

Since August, foreign capital has been increasing its investment in the Indonesian capital market. According to data from the country's Ministry of Finance, on August 23, global funds net purchased $244.48 million worth of Indonesian bonds, marking the 12th consecutive day of purchases; according to exchange data, on August 26, global funds net purchased $60.1 million worth of the country's stocks, marking the 14th consecutive day of purchases.

Why is the Indonesian stock market currently so "hot"? Let's connect with Hu Jie, the Executive Director of the Southeast Asia Center at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University.

Indonesia Has Multiple Fundamental Advantages

Hu Jie: Indonesia is favored by many investors due to its multiple advantages. Firstly, Indonesia is the largest economy in terms of GDP among ASEAN countries. In addition, Indonesia has a large population of about 270 million people, and the population structure is very young, with a median age of about 29 years old, which is 10 years younger than China and 20 years younger than Japan. In recent years, Indonesia has adopted a strategy centered on economic development, maintaining a robust economic growth momentum. From a geopolitical perspective, Indonesia is also relatively well-regarded by countries around the world, which is not much in dispute. These factors constitute the fundamental advantages of Indonesia's economy.

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It is worth noting that Indonesia's per capita GDP is equivalent to China's level in 2010, indicating that its economic development level is roughly 15 years behind China. It is precisely this gap that many investors are optimistic about, as they believe that Indonesia's market has tremendous room for improvement.

Indonesia is Favored by International Investors

Hu Jie: With the start of the Federal Reserve's interest rate cuts, the US dollar has become relatively abundant, so investors will re-evaluate the global investment landscape and redeploy. In this process, countries with high development potential like Indonesia will receive more attention. Although there have been minor political fluctuations in Indonesia recently, from an overall perspective, the Indonesian government's policy of focusing on economic development will not change, and it will continue to welcome international investors to invest in Indonesia. Therefore, considering the macroeconomic situation, international politics, and the abundance of the US dollar, Indonesia is still favored by many international investors.

Indonesian Rupiah Strengthens in August

At the same time, the exchange rate of the Indonesian rupiah against the US dollar rebounded in August and successfully erased the losses since the beginning of the year on August 20. As of 18:00 on August 28, Beijing time, the Indonesian rupiah exchange rate has risen by 5.31% compared to the end of July.What factors are driving the appreciation of the Indonesian Rupiah? How does the strengthening of the Indonesian currency affect the foreign exchange market? Ni Shuhui, a research assistant at the International Finance Research Office of the Institute of World Economics and Politics, Chinese Academy of Social Sciences, shares her insights with us.

Domestic and international factors boost the Indonesian Rupiah

Ni Shuhui: The main external factor driving the appreciation of the Indonesian Rupiah in August was the decline in the US Dollar Index. Both the statement by the Federal Reserve Chairman on August 23 and the minutes of the Federal Reserve's monetary policy meeting in July sent a clear signal that US monetary policy is about to shift. Subsequently, US Treasury yields fell sharply, and the US Dollar Index declined significantly. As of August 26, the US Dollar Index fell to the 100 mark, down 3.32% from the end of July.

The main internal factors driving the appreciation of the Indonesian Rupiah were the inflow of foreign capital and a significant increase in the export of mineral products. According to data from the Investment Ministry, Indonesia received about 829 trillion Rupiah (equivalent to 53 billion US dollars) in domestic and foreign investment in the first half of 2024, an increase of 22.3% compared to the same period in 2023. According to data from the Trade Ministry, Indonesia's export volume of nickel products reached a scale of 954,000 physical tons in July.

At the same time, Indonesia's domestic price index continued to decline, with the CPI falling from 2.5% in the second quarter to 2.1% in July, which is also conducive to domestic investment and consumption in Indonesia. Finally, the Indonesian Rupiah had a significant depreciation trend in the first two quarters, and this appreciation is also affected by the base period effect.

The strengthening of the Indonesian Rupiah eases the pressure on foreign exchange reserves

Ni Shuhui: The appreciation of the Indonesian Rupiah this time first shows Indonesia's robust domestic economic fundamentals and strong investment potential. As a major domestic demand country, the stabilization of Indonesia's exchange rate will help reduce the investment and operational risks for domestic enterprises, thereby better attracting foreign investment.

Secondly, the appreciation of the Indonesian Rupiah this time has also greatly eased the pressure on Indonesia's foreign exchange reserves. Indonesia's foreign exchange reserve scale is relatively small compared to its economic size; Indonesia's total foreign exchange reserves are about one-third of the foreign exchange reserves of South Korea and Singapore at the same period, and about 60% of Thailand's. In the first half of the year, the Indonesian government used a large scale of foreign exchange reserves to stabilize the exchange rate, and the scale of foreign exchange reserves once fell by nearly 10 billion US dollars. The strengthening of the Indonesian currency will greatly ease the pressure of the reduction of foreign exchange reserve scale and provide a guarantee for the further stabilization of the exchange rate in the future.

However, it should be noted that the appreciation of the Indonesian Rupiah this time is greatly influenced by the US Dollar Index, and future interest rate cuts by the Federal Reserve may also have a multifaceted impact on the world economy, so it is necessary to remain highly vigilant.

Continue to pay attention to the impact of the Federal Reserve's interest rate cuts.Ni Shuhui: The recent appreciation of the Indonesian Rupiah is actually a microcosm of the significant rise of non-US currencies against the backdrop of the recent appreciation of the US Dollar Index. The depreciation of Asian currencies in the first half of the year was also the case. As of August 26, the Indonesian Rupiah appreciated by 5.94% compared to the end of July; during the same period, the Malaysian currency appreciated by 5.96%, almost on par with the Indonesian Rupiah; the currencies of Thailand, the Philippines, South Korea, and Japan also saw very notable appreciation.

In the future, it may be more important to focus on the multifaceted impacts brought about by the Federal Reserve's interest rate cuts, especially on emerging markets, such as the risks of global financial market turmoil, the risks of trade process slowdown due to currency appreciation, and the risks of triggering a new round of asset bubbles due to foreign capital inflows. In response, Indonesia should stabilize its domestic economic fundamentals, support key industry exports in various ways, steadily attract foreign investment, and thereby contribute to stabilizing global exchange rate fluctuations.

Indonesia's economy grows by more than 5% in the first half of the year

Data released by the Central Statistics Bureau of Indonesia on August 5 shows that in the second quarter of 2024, Indonesia's economy grew by 5.05% year-on-year, with positive growth in various sectors compared to the same period last year, and the economic growth for the first half of the year was 5.08%.

Over the past few years, Indonesia has been working hard to cope with the negative impacts brought by global inflation and the strengthening of the US dollar. Is this trend effectively improved now? What new opportunities will the Indonesian market face? Let's listen to the interpretation by Professor Wu Chongbo from the Institute of International Relations and the South Sea Research Institute at Xiamen University.

It is difficult to improve the pressure of high US interest rates in the short term

Wu Chongbo: It can be divided into two levels. First, from the perspective of inflation, the inflation in Southeast Asia in recent years has not been too high, including Indonesia. Indonesia once had a higher inflation rate, but now, through the government's efforts, inflation has been relatively successfully controlled.

Second, the Federal Reserve raised interest rates several times in 2023, which had a significant impact on the currencies of Southeast Asian countries, especially the currencies of Indonesia, Malaysia, and Thailand, which fell sharply. Before the Federal Reserve starts a large-scale interest rate cut process, this situation may be difficult to significantly improve.

The Federal Reserve may start the process of interest rate cuts from September, but whether it will be of practical significance and have a substantial impact remains to be observed. Therefore, in the short term, Southeast Asian countries will not be able to fundamentally improve their response to the pressure from the previous interest rate hikes by the United States.

Two promising sectors in Indonesia

(Note: The translation ends here as the original text does not provide further details on the promising sectors in Indonesia.)Wu Chongbo: After the Federal Reserve truly cuts interest rates, it will be beneficial to Indonesia's capital market. Foreign capital accounts for a significant proportion in the Indonesian stock market, more than 60% to 70%. Previously, after the Fed raised interest rates, there was a noticeable trend of foreign capital flowing back from the Indonesian stock market to the United States. Although the Indonesian stock market has been performing strongly, and the profits of shareholders have been relatively good in the Asia-Pacific region, the improvement in this aspect will be more evident once the Fed truly starts to cut interest rates — foreign capital will flow back into the Indonesian stock market. The Indonesian stock market has done a relatively good job in regulatory standards compared to other developing countries, so the capital market is likely to see better improvements.

In terms of industry, capital will also gradually flow into Indonesia's emerging industries. There are two promising areas for the future. The first is the digital economy. Due to Indonesia's large population, the application scenarios of the digital economy are developing rapidly, with a vast number of internet users and third-party payment users, making the digital economy a broad and promising sector.

The second is the green economy. Indonesia is currently actively promoting a green transition. Firstly, in terms of primary energy transition, Indonesia currently mainly relies on coal power but is gradually transitioning to an electricity system dominated by emerging energy sources. Secondly, Indonesia has abundant nickel ore resources, accounting for about 50% of the global reserves. Nickel ore is one of the key raw materials for the production of new energy vehicle lithium batteries, therefore, Indonesia is striving to become a lithium battery production and processing center in the Southeast Asia region.

In the future, if the United States begins to cut interest rates, this will be advantageous for the development of various industries in Indonesia.