News of big stimulus plans shores up Indonesian stocks, currency

After the new policies were unveiled yesterday, the rupiah firmed up, reaching 13,980 to the greenback after having plunged to a 17-year low. The Indonesian currency also strengthened against the Singapore dollar as market sentiment improved. Even so
After the new policies were unveiled yesterday, the rupiah firmed up, reaching 13,980 to the greenback after having plunged to a 17-year low. The Indonesian currency also strengthened against the Singapore dollar as market sentiment improved. Even so, analysts remained cautious about how effective the moves would be in countering the country's sagging economy.PHOTO: REUTERS

Indonesian stocks surged the most in two years, while the rupiah gained for the first time in nine days, as the nation's new economic team unveiled major stimulus plans to perk up the sagging economy - starting with an "appetiser" scheme that will offer more extensive tax holidays to investors.

Full details of the plans have yet to be disclosed, but could be revealed as early as next week.

Yesterday's pledges come at a time when South-east Asia's largest economy is grappling with a weak stock market, a sliding currency and a lower economic growth forecast for the year.

Finance Minister Bambang Brodjonegoro, who is part of the newly installed team, said yesterday that firms investing over 1 trillion rupiah (S$100 million) in sectors such as chemicals, machinery, agriculture, maritime transport and oil and gas would pay lower taxes for five to 15 years.

His new Cabinet colleague, Chief Economic Minister Darmin Nasution, vowed to release the entire stimulus package soon.

These promises seemed to boost investor confidence as equities gained and the Jakarta Composite Index jumped 4.6 per cent - the strongest gain in two years.

The rupiah, which hit a 17-year low in early trading yesterday, strengthened 1 per cent, reaching 13,980 to the greenback, in early signs of support for the plans. It was trading at 10,007.49 to the Singapore dollar in the afternoon, after having reached an all-time low of 10,110 on Wednesday.

News of the policies shored up sentiment, Investa Saran Mandiri analyst Hans Kwee told the Wall Street Journal, but he said "we still need to see the implementation".

Other analysts welcomed the initiatives, but remained cautious over their ability to throw off the economic stagnation setting in.

"We do not expected to see a significant boost in capital inflows as investors continue to stay away from emerging markets, given the recent global volatility," BMI Research said in a report.

"These policies will be positive for Indonesia, but they are unlikely to boost investment significantly over the near term."

Resource-rich Indonesia has been hit hard by sagging commodity exports - the result of falling demand from a slowing China.

Government spending and investment growth have slowed as well.

In the second quarter, the economy expanded at its slowest pace since 2009, forcing Bank Indonesia to lower its growth estimate for the year from 5-5.4 per cent to 4.7-5.1 per cent. The forecast for next year was lowered from 5.4-5.8 per cent to 5.3-5.7 per cent.

A move to raise import duties on cars, liquor and other products was widely seen as a sign of protectionist tendencies. Foreign investors have sold a net US$1.5 billion (S$2.1 billion) in local stocks in the past 12 months, based on Bloomberg data.

Faced with growing investor concerns about his ability to push through promised reforms, even as his popularity plunges, President Joko Widodo reshuffled his Cabinet earlier this month, putting two technocrats in economic management posts to reassure investors worried about policy drift.

One of them is Mr Nasution, who promised yesterday to deliver a comprehensive policy package next week that will include "deregulation in the real and financial sectors".

"First, it will make economic activity smoother. Second, it will push for foreign currency to come in," he pointed out.

Tax cuts of between 10 per cent and 100 per cent will be put in place, Mr Brodjonegoro said, but he added that financial markets would have to wait a bit longer for details as "policies don't fall from the sky".

"We have to prepare it first... if this is like a meal, we're still having the soup," he said.

A version of this article appeared in the print edition of The Straits Times on August 28, 2015, with the headline 'News of big stimulus plans shores up Indonesian stocks, currency'. Print Edition | Subscribe