The Fed’s Tapering, What’s The Impact on the Indonesian economy?

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The central bank of the United States (US), the Federal Reserve (The Fed) will begin reducing asset purchases or also known as tapering at the end of this November.

This decision is the first step for the Fed to withdraw a large amount of assistance the US central bank has provided to its markets and economy during the Covid-19 pandemic.

Tapering is a phase that the US must take to restore its economic position after months of quantitative easing (QE).

QE itself is an unconventional form of monetary policy in which the central bank purchases long-term debt securities from the open market to increase the money supply in order to encourage loans and investments that will drive the economy.

Buying these bonds will add new money to the economy, and also lower interest rates, and be able to enlarge the balance sheet of the central bank.

Since the first time the US government did after the 2008 economic crisis to prevent the economy from stopping, QE has been carried out several more times, most recently in pumping the economy into facing the pandemic crisis.

In March 2020, the Fed began conducting its fourth QE since the 2008 financial crisis, which on March 15, 2020, announced a new QE of approximately US$700 billion through asset purchases to support US liquidity.

Of course, the economy that is pumped by QE cannot survive in the long term, given the negative potential that may occur such as uncontrolled inflation. This causes the US government to do a tapering to restore conditions to the original time when the economy is considered ‘recovered’.

The newly announced asset purchase reduction program (tapering) is a reduction of US$ 15 billion per month, from the previous total of US$ 120 billion per month purchased by the Fed at this time.

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“The downturn in bond-buying will begin later this month,” the Federal Open Market Committee (FOMC) policymaker said in a post-meeting statement.

The FOMC said the tapering measure was carried out taking into account the substantial progress of the US economy as the Committee’s objective since December 2020.

“The Committee assesses that a similar reduction in the pace of net asset purchases is likely to be appropriate on a monthly basis, but stands ready to adjust the pace of purchases if warranted by changes in the economic outlook,” the FOMC said.

Earlier in a press conference on November 3, 2021, Fed Boss Jerome Powell insisted that, despite tapering, the Fed’s stance would remain “accommodative,” still trying to keep interest rates near zero.

“It would be too early to raise interest rates now,” he said in response to a subsequent question on inflation.

Rupiah

The rupiah had weakened against the United States (US) dollar in trading last Thursday to touch its weakest level in more than 2 months. However, on Friday’s trading, the rupiah was recorded to strengthen again.

The announcement of the Fed’s policy is certainly one of the main drivers of the foreign exchange (forex) market.

According to Refinitiv data, on Thursday the rupiah fell 0.35% to Rp 14,345/US$, the weakest level since August 30.

The CNBC Indonesia Research Team assesses that the tapering of the Fed this time will not trigger turmoil in the market like in 2013 or known as the taper tantrum.

At that time, the rupiah exchange rate fell sharply. Meanwhile, on Thursday’s trading, although the rupiah weakened, it was still within reasonable limits.

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This means that the Fed has succeeded in suppressing the taper tantrum.

One of the keys to the Fed’s success in reducing taper tantrums is good communication with the market. The Fed Chairman Jerome Powell since the beginning of this year has given a signal that he will do tapering.

So the market has prepared ahead of time. The movement of all assets has taken into account the occurrence of tapering.

In contrast to 2013, the market was shocked by the Fed’s decision which eventually triggered capital outflows from emerging market countries, resulting in a taper tantrum.

Bank Indonesia (BI) said the weakening of the rupiah was only temporary, and market participants did not need to be overly anxious.

This was conveyed by the Head of the BI Monetary Management Department, Hariyadi Ramelan to CNBC Indonesia.

“The weakening situation is expected to be temporary in line with the wait and see monetary policy in developed countries. The stability of the rupiah exchange rate is believed to be maintained, supported by strong fundamental conditions and the attractiveness of domestic financial assets which is relatively high compared to other emerging markets,” he explained.

IHSG & SBN

As for the capital market, the Composite Stock Price Index (IHSG) closed up 0.52% to a level of 6,586.44 until the end of trading Thursday (4/11) and slightly decreased 0.071% to a level of 6,581.78 at the close of trading yesterday, Friday (6/11). ).

Meanwhile, in the debt securities market, the price of the majority of government bonds or Government Securities (SBN) closed higher on Friday trading, after the Fed will start tapering at the end of this month.

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The majority of investors are busy chasing SBN again today, marked by weak yields. Only SBN with a tenor of 20 years is still likely to be released by investors and experience strengthening yields.

According to data from Refinitiv, the yield on 20-year government bonds rose slightly by 0.1 basis points (bp) to 6.972%. Meanwhile, the yield on SBN with a maturity of 25 years tends to stagnate at the level of 7.183%.

Meanwhile, the yield on SBN with a tenor of 10 years, which is the benchmark yield on government bonds, weakened again by 1.7 bp to a level of 6.208%.

Yield is in the opposite direction of price, so a decrease in yield indicates that bond prices are strengthening, and vice versa. The unit of measurement of a basis point is equal to 1/100 of 1%.

Market Participants’ Response

Market participants also believe that the tapering that will be carried out by the Fed will not have a major impact on the Indonesian economy.

Head of Investment Information of PT Mirae Asset Sekuritas Indonesia, Roger said, the impact of tapering on the stock market in Indonesia is considered not to be too significant.

This is because investors tend to pay more attention to financial reports in the third quarter and data on the domestic economy which is starting to show a recovery, such as the Indonesian PMI index which was at the highest level of 57.2.

“The impact of tapering is not too significant for the Indonesian market. If there is a capital outflow, it will not have a significant impact on the JCI,” said Roger.

Roger added, at the end of the year, investors are likely to tend to do window dressing and improve economic data.

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