JAKARTA: The US central bank’s decision to taper its monetary stimulus will unlikely cause a major impact on Indonesia’s financial markets, though policymakers must remain mindful of future risks as the gradual pullback of the quantitative easing program will take place not only in September but also in the following months, an economist has said.

Despite the market turbulence in recent months, the economic impact from any tapering of the US stimulus to emerging market economies, including Indonesia, will be “fairly modest”, with the region even benefiting from a stronger US economy, according to a London-based economic research company Capital Economics Ltd.

“Our view is that tapering has been so well anticipated, the actual impact [for Indonesia] should be quite small,” Capital Economics analyst Gareth Leather wrote in an email interview on Wednesday.

The US Federal Reserve is scheduled to conclude their two-day meeting on Wednesday (Thursday, Jakarta time) to decide a possible cut of its monetary stimulus, with the central bank initially injecting US$85 billion of liquidity per month in the form of bond-buying programs.

The stimulus which has left the global economy awash with excess liquidity, prompting rallies in the stocks and bonds market in emerging countries would be cut by US$15 billion to $70 billion a month, US based JPMorgan Chase Bank predicted in a note released this week.

“If the size of tapering is in line with market expectations, [such as] $15-20 billion, and the central bank maintains its dovish tone, then I think Indonesian markets will at least remain on an even keel or possibly even experience some near-term upside,” Su Sian Lim, a Singapore-based economist with HSBC Bank, said on Wednesday.

Indonesia witnessed shocks in its stock and currency markets due to fears over the possibility of reduction on the US monetary stimulus.

Indonesian share prices plunged sharply after Fed Governor Ben Bernanke first hinted of cutting the pace of his bond-purchase program in May, causing the Jakarta Composite Index (JCI) to decline by about 30 per cent to 3,967.84 on August 27 from its peak of 5,214 recorded on May 24. The index has gradually increased since then. But, on Wednesday, the JCI became the worst performer among 13 global stock markets, according to World Benchmark Comparison data compiled by the Indonesian Stock Exchange.

The JCI tumbled 1.2 per cent to close on 4,465.25, as compared to 0.3 per cent lost in Thailand’s SET Index and 0.2 per cent lost in Malaysia’s FTSE BM. Indexes in Singapore and India rose by 0.4 per cent, while China gained 0.3 per cent.

The rupiah, the worst-performing currency this year, fell 0.3 per cent to trade at 11,492 per dollar, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

Hak Bin Chua, an economist with Bank of America Merrill Lynch, warned Indonesian policymakers that, although the market had already forecast small tapering in the Fed’s meeting this month, the full-extent of the stimulus withdrawal may not be priced just yet.

“Indonesia is vulnerable if the Fed tapers or reduces its bond purchases at a quicker pace than what the market expects,” he said on Wednesday. “Higher long-end US rates and a stronger US dollar because of Fed tapering will increase the pressure on Indonesian rates.”

– By arrangement with the ANN/The Jakarta Post –