Indonesia's economy has not been hit
Recently, the Indonesian economy has faced pressure from the sharp depreciation of the Indonesian rupiah. Since the end of January this year, the Indonesian rupiah has entered a downward range. On May 8, the exchange rate between the US dollar and the Indonesian rupiah hit a new high since December 2015, and it closed below 1:14,268. After that, although it rose slightly to 1:13943 on May 14th, it turned around again and went down to 1:14124 on May 25th.
Market analysis believes that the rapid depreciation of the Indonesian rupiah is mainly due to external factors such as the Fed's interest rate hike and the rise in US inflation. Some Indonesian economists have judged that the era of global low interest rates is over, and the Indonesian rupiah has fallen below the psychological threshold of 14,000. The Bank of Indonesia should immediately raise the benchmark interest rate by 25 to 50 basis points to prevent excessive consumption of foreign exchange reserves, accelerated capital outflows and Indonesian rupiah assets. Sharp depreciation. Indonesian Vice President Kara instructed that the government will support the central bank’s measures to intervene in the exchange rate, not only to prevent the rapid depreciation of the Indonesian rupiah, but also to play a role in promoting the improvement of terms of trade by the weakening of the currency.
For the "new head" party of the Bank of Indonesia, who was just sworn in on May 24, stabilizing the rupiah has become a top priority. Following the May interest rate meeting to raise the benchmark interest rate-the seven-day reverse repo rate from 25 basis points to 4.5%, Perry, who has always advocated "monetary policy not only to promote growth but also to maintain stability", said the Bank of Indonesia will implement "preemptive strike". The local currency stabilization policy of "Frontier Intervention" does not rule out the possibility of further raising the benchmark interest rate and increasing market intervention. Perry also stated that the use of monetary policy tools in this round is aimed at coping with the spillover effects of the Fed’s interest rate hike and the increase in U.S. government bond yields. The Bank of Indonesia will continue to release foreign exchange reserves and repurchase government bonds to ensure the foreign exchange market and secondary securities market. With sufficient liquidity, "since this year, we have repurchased a total of US$3.5 billion Indonesian government bonds sold by foreign investors, which will help the domestic currency market effectively respond to global economic uncertainty."
Bank Indonesia’s deputy governor Dodi believes that the Indonesian rupiah is expected to stop falling and rebound due to the controllable fundamentals of the Indonesian economy. The inflation rate is lower than the central bank’s target range of 2.5% to 4.5%. The fiscal deficit and current account deficit are both in national production. A safety zone within 3% of the total value. At the same time, the Ministry of Finance report shows that although the rupiah depreciation has exceeded the 13,400 target set by the National Budget in 2018, which has added a certain burden to government debt payments and imported energy subsidies, it has not yet managed the country’s finances. And budget implementation have a major impact.
Indonesian Finance Minister Siri believes that observing the negative effects of the rupiah depreciation depends on whether it exerts pressure on inflation. It is necessary to pay close attention to the reaction of imports and energy subsidies to the weakening of the domestic currency. All government departments will work with the central bank to ensure inflation. The level is controllable. For example, the Ministry of Finance, the Ministry of Energy and Minerals, and the Ministry of State-owned Enterprises have just held a joint meeting to maintain the stable operation of state-owned oil and gas companies and state-owned power companies. The focus is to ensure a balance of revenue and expenditure to better respond to external risks.
In general, apart from the rapid depreciation of the local currency, the fundamentals of the Indonesian economy can still remain stable. In the first quarter of this year, mainly driven by investment, Indonesia's economy grew by 5.06% year-on-year, an increase of 0.05% from the same period last year. Indonesia’s Central Bureau of Statistics Director Suharijando said that consumption, which contributes more than half of the GDP, increased by 4.95%, investment growth reached 7.95%, and imports and exports increased by 6.17% and 12.75% respectively. It is worth mentioning that the investment growth rate increased by 3.18% compared with the same period last year, which was mainly attributed to the advancement of infrastructure construction and the growth of capital goods in the equipment manufacturing industry. For example, the demand for building materials and machinery demand increased by 5.87% and 23.72%, respectively. According to statistics from the Indonesian Investment Coordination Commission, the total investment in the first quarter was nearly US$14 billion, an increase of 11.8% over the same period last year. In view of this, the Bank of Indonesia recently predicted that due to the dual role of rapid rebound in commodity prices and tax reductions to attract foreign investment, Indonesia's economic growth rate in the second quarter will reach 5.15%, and the annual economy is expected to achieve 5.2% growth.
Perry believes that the strong recovery in commodity prices is a major benefit to regions that rely heavily on resource exports such as Sumatra and Kalimantan, and the weakening of the Indonesian rupiah also promotes exports to a certain extent. At the same time, large-scale financial investment in infrastructure construction has driven the expansion of private sector investment, and investment-driven growth has become increasingly obvious.
Suhariyando predicts that this year’s economic growth will have many benefits, such as the Ramadan holiday, local elections, and the Asian Games, which can further stimulate consumption and investment. In addition, the government’s various reform measures to improve the business environment and increase market competitiveness will continue. Advance, I believe there will be better performance in the next few quarters.
Indonesian President Joko pointed out that the current economic operation of Indonesia is facing greater pressure from external risks. The fluctuation of the exchange rate between the local currency of emerging economies, including the Indonesian rupiah, against the US dollar has become a major new trend in the international financial market. “The government will support and cooperate with the intervention of the Bank of Indonesia. Policies, the Ministry of Economic Coordination, the Ministry of Finance and other government departments will issue corresponding policies to jointly achieve the macro-control goals with the central bank." Indonesian Vice President Kara urged that the fundamentals of the Indonesian economy are still improving, and the market does not need to panic about short-term fluctuations. From another perspective, the depreciation of the Indonesian rupiah is a positive factor for the export of palm oil, rubber, coffee, cocoa and other products. Indonesia should take care of it. The opportunity of improving the terms of trade to improve productivity and competitiveness in the international market.
The new governor of the Bank of Indonesia, Pai Li, stated that in order to better deal with the spillover effects of the Fed’s interest rate hike, especially the Fed’s expected rate hike in mid-June, Indonesia’s monetary policy will adopt measures such as “preemptive” and “pre-intervention” to ensure the value of the Indonesian rupiah. To stabilize, prevent capital flight, maintain the order of the financial market, and deepen the reform of the financial system, Indonesia will not rule out the possibility of raising interest rates again in the future. At the same time, the Bank of Indonesia issued a statement on May 30 stating that the prerequisite for raising interest rates is to ensure that the inflation rate remains at a controllable level below 3.5%. To this end, the Bank of Indonesia has simultaneously implemented interventions such as financial market price corrections and repurchases of government bonds to ensure sufficient liquidity in the foreign exchange market and the inter-bank lending market. In addition, the Bank of Indonesia will work with the Ministry of Economic Co-ordination, the Ministry of Finance, and the State Administration of Financial Services to actively guide market players to form rational expectations on the value of the Indonesian rupiah and the fundamentals of the national economy to ensure a steady growth momentum in the medium and long term.