•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   
•    EYEWITNESS   

Signs of stability in the euro zone economy and a possible spike in inflation this year threaten to drag Indonesia’s foreign-exchange, bond and stock markets lower, halting the promising run of the past few weeks.

Bankers, fixed-income traders and analysts in Jakarta now say that foreign investors, who had poured money into Indonesia’s shallow financial markets in the past year, are staying away and seeking the safety of assets such as US bonds.

Branko Windoe, the head of treasury at Bank Central Asia, Indonesia’s third largest lender by assets, said that higher crude oil prices combined with signs of economic recovery in developed nations including those in the euro zone have prompted international investors to pull funds from emerging markets such as Indonesia and to place their money in the United States and Europe.

He cited the United States posting encouraging housing and employment data, Europe’s business confidence index coming in better than expected and Greece poised to receive its second bailout fund.

“Investors who were afraid to enter those markets, now that Greece has found a short-term solution and avoided default, are now returning to those markets,” Branko said.

A foreign currency dealer at a joint-venture bank who declined to be identified said that despite some “mild intervention” by the central bank, the currency has yet to return to a strong footing. Bank Indonesia has been selling dollars to buy rupiah in the market in recent trading days, the dealer said.

The rupiah declined 0.3 percent to 9,070 against the dollar this week.

Like the rupiah, Indonesia’s secondary bond market was under huge selling pressure by foreign investors. Bond dealers and analysts also say that a possible threat from rising inflation this year has caused negative sentiment on the country’s debt market, which is pushing down prices of the government’s long-term notes in the past few days.

“The rupiah’s decline is a side-effect from the bond market,” said Anton Gunawan, an economist at Bank Danamon, the country’s seventh largest lender by assets in Jakarta.

The yield on the government’s 10-year bonds rose to 5.294 percent on Friday from 5.219 percent on Thursday, and the yield on five-year notes maturing in 2017 climbed to 4.609 percent on Friday from 4.539 percent, according to the Indonesia Bond Pricing Agency. Bond yields move inversely to price.

Bond analysts say that the rising yields show foreign investors have shunned the country. Foreign holdings of Indonesian bonds fell to Rp 232 trillion ($25.8 billion) as of Wednesday, from Rp 236 trillion 10 days earlier, data from the debt management office at the Finance Ministry shows.

Investors are also spooked by comments from Bank Indonesia governor Darmin Nasution, who said on Thursday that inflation, which slowed to a 22-month low of 3.65 percent in January, may rise and exceed the upper level of its 5.5 percent forecast this year should the government lift the price on subsidized fuel in April.

“With the price increase, investors, especially the foreign ones, are worried that inflation will reach 7 percent this year,’’ said Bank Danamon’s Anton.

Meanwhile BCA’s Branko says that a possible increase in fuel price in the next few months will not be the main reason for investors to stay away from Indonesia.

Analysts said that foreign investors also dumped their holdings of Indonesian stocks on Friday in an attempt to cash in on the gains of recent days.

The benchmark Jakarta Composite Index lost 64.25 points, or 1.6 percent, to close Friday at 3,894.56 — its lowest in three months. For the week, it dropped 2.1 percent. In January, the JCI rose 3.1 percent, the best start to a year since 2006, extending last year’s 3.2 percent gain.

Investors, though, used the scenario of accelerating inflation as an excuse to exit the market, some analysts said.

Edwin Sebayang, head of research at MNC Securities in Jakarta, said concerns of the fuel price increase added to negative sentiment in the local market.

“This will be a crucial domestic factor for the JCI, up until the actual implementation [of fuel subsidy changes] in April. Stocks that are related to oil, like transportation, automotive, banking, and oil-based chemicals, will be easy targets,” he said.

In Friday’s trading, more than 4.41 billion shares worth Rp 5.8 trillion changed hands at the Indonesia Stock Exchange. Declining stocks far outnumbered gainers, 221 to 48. Foreign investors also fled the market, selling Rp 896 billion more in shares than they bought.

“The global crude oil price and the plan to increase the price of subsidized fuel made oil-related stocks suffer short-term sell pressure,” Edwin said.

Shares in Medco Energy International, Indonesia’s largest publicly traded oil company, and Energi Mega Persada, an oil explorer and producer, fell in Friday’s trading.

Crude oil currently fetches $108.08 a barrel in New York, a nine-month high, and has the potential to touch $120 per barrel if Iran stops supplying oil to nations in Europe, analysts say.

BCA’s Branko said that the concern over the oil price, which could result to higher inflation, is not only Indonesia’s problem but represents a global concern.

“While Indonesia’s fuel price is about to be increased, the fuel price at some other country has already risen because of the tension in the Middle East,” he said.