The Threat of Tapering Off is Getting Clearer, Foreign Funds of Rp90 Trillion in Bonds have Left Indonesia

The Indonesian government’s concern about the threat of tapering off or reducing the Fed’s stimulus is getting bigger after the United States released May 2021 inflation data of 5%.

Minister of Finance, Sri Mulyani Indrawati, said the dynamics of the economy in the United States (US) had a multiplier effect on various sectors in Indonesia.

In addition to causing high volatility in the capital market, the Fed’s policy can also depress the value of rupiah, thereby reducing the attractiveness of the auction of Government Securities (SBN).

“This capital outflow is being watched by emerging markets such as Indonesia. The Fed’s policy speculation can trigger concerns that will affect our capital and state securities,” said Sri Mulyani.

In fact, it is alleged that the future capital outflow will be even worse than the 2008 financial crisis.

Sri Mulyani compared that during the global financial crisis period, foreign capital flows returned to developing countries in the sixth month, while entering the 15th month during the COVID-19 pandemic, the outflow of funds had not returned.

Bank Indonesia also estimates that the tapering off (tightening of monetary policy) that will be carried out by the Fed could happen in 2022, rather than this year.

The following is a summary of capital flows from foreign investors in the bond market and stock market in Indonesia during the pandemic.

Bond Market

Data from the Ministry of Finance’s Directorate General of Budget Financing and Risk Management shows that there is a capital outflow of foreign investors worth Rp90.7 trillion for 15 months ending in May 2021. This value comes from the difference between the holdings of foreign investors’ rupiah state securities (SBN) since the end of February 2020 which amounted to Rp1,048,16 trillion to the position of Rp957.46 trillion as of May 31, 2021.

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From the data above, the trend of capital outflows began to occur since March 2020. Capital outflows reached Rp121.25 trillion for just 1 month in March 2020. This figure contrasts with the inflow of funds (capital inflow) in March 2019 which amounted to Rp24.39 trillion.

The capital outflow that has occurred since March last year can be linked to the decision by the Indonesian government to declare the COVID-19 outbreak a national disaster.

Since March 2020, the trend of capital inflows that were maintained in 2019 has reversed into capital outflows. In detail, throughout 2019 foreign investors increased their holdings in rupiah state securities up to Rp168.38 trillion. Meanwhile, throughout 2020, foreign investor funds amounting to Rp89.38 trillion came out of rupiah state securities.

Stock Market

If in the rupiah state securities market funds from foreign investors seep out, this is not the case in the stock market. Up until June 15 or almost 1 semester of 2021, foreign investors recorded a net buy on the Indonesia Stock Exchange (IDX) worth Rp17.01 trillion.

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This net buying condition is the opposite of the first semester of 2020 which recorded a net sale. Based on data from the Financial Services Authority (OJK), the net sell of foreign investors in the first half of last year was Rp3.45 trillion.

The total net sales of foreign investors reached Rp47.88 trillion throughout 2020. In the last 10 years, 2020 – the year the COVID-19 pandemic hit Indonesia – became the second year in which foreign investors recorded the largest net sell after 2018.

Writer: Gloria Natalia Dolorossa