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I. Overview
Indonesian economy showed optimism in the period of 2003 up to mid 2005. Inflation was under controlled, Rupiah exchange rate was stable and GDP has been growing progressively since 2003. In particular, inflation quarter to quarter (q-t-q) in 2005 was around 1% - 3% (q-t-q) due to increased trend in economic growth followed by good coordination in fiscal and monetary policy. Rupiah moved relatively stable from January 2005-July 2005 in range Rp9200/USD-Rp9800/USD owing to conducive fundamental economics, positive public expectationwith regard to new government and equilibrium supply and demand of foreign exchange in the market. As of this, SBI rate (central bank»s interest rate) lied in low level (between 7%-8%)during 2003-2005 to strongly support economic activities while kept aware of tolerable inflation rate. Therefore, GDP-one of the most important economic indicators- confirmed positive performance. It was 6.12% (y-o-y) in 1st quarter of 2005 and a little bit decelerating to 5.34% (y-o-y) in 3rd quarter but with an increase share of investment to equalize high consumption.
Indonesian economy showed optimism in the period of 2003 up to mid 2005. Inflation was under controlled, Rupiah exchange rate was stable and GDP has been growing progressively since 2003. In particular, inflation quarter to quarter (q-t-q) in 2005 was around 1% - 3% (q-t-q) due to increased trend in economic growth followed by good coordination in fiscal and monetary policy. Rupiah moved relatively stable from January 2005-July 2005 in range Rp9200/USD-Rp9800/USD owing to conducive fundamental economics, positive public expectationwith regard to new government and equilibrium supply and demand of foreign exchange in the market. As of this, SBI rate (central bank»s interest rate) lied in low level (between 7%-8%)during 2003-2005 to strongly support economic activities while kept aware of tolerable inflation rate. Therefore, GDP-one of the most important economic indicators- confirmed positive performance. It was 6.12% (y-o-y) in 1st quarter of 2005 and a little bit decelerating to 5.34% (y-o-y) in 3rd quarter but with an increase share of investment to equalize high consumption.
Nevertheless, in August√September 2005 (3rd quarter of 2005) there were some external factors influenced the economy. The biggest ones were coming from world oil price soaring up to USD70/ barrel and tight monetary policy from developed countries mainly in US. World oil price directly influenced the performance of previous economic indicators including balance of payment and financial market as well. In balance of payment, whereas oil import was the major part of import activities fueled by high domestic oil consumption, the world oil price hike became a serious problem.
Finally, this condition ended up with a pressure on Rupiah exchange rate which going up to Rp10,000-Rp11,000/USD in August√September 2005 followed by mounting in inflation because the government lessened oil subsidy in Government Budget (APBN) by adjusting domestic fuel price. As a response, Bank Indonesia moved BI-Rate up to lowering the inflation pressures, assuring mid term inflation target to be achieved and maintaining the stable macroeconomic condition.
On the whole, Rupiah depreciation, towering inflation and monetary policy respond to increase BI-rate have totally affected both domestic bond market and mutual fund market whereas bond took dominant part in their investment portfolio. Panic selling happened in that time followed by falling down of bond prices and trading value went up due to that panic. Instead of shock in economic indicators, the bearish condition was also triggered by mark to market policy from Indonesian Capital Market Agency (Bapepam). Lately, this redemption case has given very good lessons to all parties involved in Indonesian financial market.
Journals for full download on the link below
Finally, this condition ended up with a pressure on Rupiah exchange rate which going up to Rp10,000-Rp11,000/USD in August√September 2005 followed by mounting in inflation because the government lessened oil subsidy in Government Budget (APBN) by adjusting domestic fuel price. As a response, Bank Indonesia moved BI-Rate up to lowering the inflation pressures, assuring mid term inflation target to be achieved and maintaining the stable macroeconomic condition.
On the whole, Rupiah depreciation, towering inflation and monetary policy respond to increase BI-rate have totally affected both domestic bond market and mutual fund market whereas bond took dominant part in their investment portfolio. Panic selling happened in that time followed by falling down of bond prices and trading value went up due to that panic. Instead of shock in economic indicators, the bearish condition was also triggered by mark to market policy from Indonesian Capital Market Agency (Bapepam). Lately, this redemption case has given very good lessons to all parties involved in Indonesian financial market.
Journals for full download on the link below
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