Economists, bond traders and foreign exchange dealers in Jakarta said the outlook of the two markets for the coming weeks was bleak.
"Uncertainty remains high and will remain so in the coming days," said David Sumual, an economist at Bank Central Asia (BCA) here. "That would dampen market sentiment on the bond and rupiah market. "
The government has proposed increasing the subsidized fuel price in April to 6,000 rupiah (about US$0.6) a litre from 4,500 rupiah.
The plan still needs approval from lawmakers, and speculation has abounded that it might not happen, creating uncertainty for investors.
"There is talk in the market that the planned fuel price increase will be scrapped or postponed," said a fixed-income dealer at a Jakarta bank who declined to be identified.
The dealer added that political opposition to plan suggested it might not be put into effect until more debates were held to discuss its merits.
The Prosperous Justice Party (PKS) and the Indonesia Democratic Party of Struggle (PDI-P) have voiced their opposition to the subsidy cut, while the Golkar Party and the Democratic Party support the plan.
The yield of the government's 10-year bond rose to 6.0685 percent on Friday from 6 percent the previous day while the 15- year bonds increased to 6.607 percent from 6.529 percent, according to data from Indonesia Bond Pricing Agency. Bond yields move inversely with bond price, the Jakarta Globe reported.
As of March 9, foreign holdings of Indonesian bonds had fallen to 226 trillion rupiah (about US$24.8 billion) from 236 trillion rupiah in early January. Almost US$1 billion worth of funds have been pulled out of Indonesia in the last one and a half months alone.
The capital outflow led to a decline in the rupiah in recent weeks. On Friday it gained ground slightly to trade at 9,178 against the dollar, compared with Thursday's close of 9,193, thanks in part to the central bank selling dollars. The rupiah lost 0.2 percent against the dollar across the week.
Foreign exchange dealers said the central bank's move to intervene in the foreign exchange market prevented the rupiah from sliding further on Friday.
Bank Indonesia said in a March 8 statement that it would continue to observe and intervene in the foreign exchange and bond markets to stabilise the currency.
Foreign exchange dealers said Indonesia's central bank would do whatever it could to prevent the rupiah from breaking the 9,200 level against the dollar.
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