Find a way under the pressure of Indonesia's economy
Since 2018, the negative spillover effects of a series of U.S. trade protection policies have largely pushed up risks in Indonesia's financial market. First of all, the Indonesian rupiah has entered a downward range. On May 3, the US dollar to Indonesian rupiah exchange rate broke through the 1:14000 psychological defense line for the first time since 2015; on July 24, the US dollar to Indonesian rupiah exchange rate hit a new high in two and a half years, and closed at 1:14567. Second, the current account deficit has expanded. According to data from the Bank of Indonesia, the current account deficit rate in the first quarter exceeded 2.1%, and is expected to reach 2.3% for the whole year, which is higher than the previously generally expected 2%. The Bank of Indonesia's latest estimate on July 25 said that the current account deficit this year may exceed 25 billion U.S. dollars, an increase of 7.5 billion U.S. dollars from last year. Third, the scale of foreign debt continues to expand. As of the end of April, the Indonesian government and central bank held US$183.8 billion in foreign debt, while state-owned enterprises and the private sector held US$173.1 billion. The total scale of the two increased by 7.6% over the same period last year, and the debt service credit risk continued to rise throughout the year.
Market analysis generally believes that the above-mentioned risks are mainly due to external factors such as the Fed's interest rate hike, rising U.S. inflation, and the intensified unilateral tendency of U.S. trade policy. The Indonesian economy has been heavily dependent on foreign capital inflows, with foreign capital holding up to 38% of national debt. Therefore, the international capital market has a great influence on its financial market, and Indonesia has become one of the emerging market countries that have been most impacted by the protectionist policies of the United States. According to data from the Bank of Indonesia, the net capital outflow in the first quarter alone has reached nearly US$4 billion, and the current account deficit has reached US$5.5 billion, which is a far cry from the previously expected annual balance of payments surplus of US$5 billion to US$7 billion.
Take multiple measures to alleviate the crisis
In the face of increasing global economic uncertainty, especially the negative spillover effects of U.S. policies, Indonesian President Joko Widodo pointed out that the current economic operation of Indonesia is facing greater pressure from external risks. The local currency of emerging economies, including the Indonesian rupiah, has oscillated against the U.S. dollar. Become a major feature of the international financial market. The Minister of Economic Coordination of Indonesia, Darmin, believes that in order to ensure the long-term stable and sustainable growth of the national economy, macro-control, including monetary policy, should be promoted in concert, with particular emphasis on implementing economic structural reforms, improving the business and investment environment, and Prioritize the development of the real economy and enhance export competitiveness. "This requires comprehensive reforms in various fields such as infrastructure, license management, customs services, tax reduction and exemption, research and development capabilities, and talent training."
The first to act was the Bank of Indonesia. Since May 17, the benchmark interest rate, the seven-day reverse repo rate, has been raised three times from 4.25% to 5.25%. This indicates that Indonesia's monetary policy has been adjusted from "overall neutral" to "tighter". The new governor, Pari, said that monetary policy will pay more attention to early warning and early intervention to ensure the stability of the Indonesian rupiah, prevent capital flight, maintain the order of the financial market, and deepen the reform of the financial system. Perry pointed out that raising interest rates is the first step in Indonesia’s “stability priority” monetary policy adjustment, that is, to stabilize the Indonesian rupiah exchange rate, and the central bank is ready to convene an interim interest rate meeting to approve interest rate hike decisions; the second step, the central bank will continue to intervene in foreign exchange simultaneously. The market and government bond markets ensure fair exchange rate prices and sufficient liquidity in the foreign exchange market; the third step will focus on inter-bank lending to ensure that financial institutions have sufficient liquidity; the fourth step will be to strengthen market players, financial institutions, and business communities , Effective communication among economic circles, and jointly promote the formation of rational expectations in the market.
In the face of external pressure, Indonesia's trade sector has also made a "stress response." Indonesia’s Minister of Industry Allanga said that global steel production capacity is rapidly increasing, but the unilateral increase in import tariffs by the United States as the world’s major steel consumer will induce a new round of adjustments in the global steel market, and Indonesia has to introduce policies to protect domestic steel. market. President Joko Widodo signed a presidential decree to launch the "National Import and Export Single Window" on June 12, which will centrally manage and process data and information submitted by importers and exporters to various ministries, including the quantity of goods, tariffs, licenses, customs clearance documents, etc. ; At the same time, eight new international trade ports will be added, which will greatly reduce the logistics costs of participating in international trade in remote or backward areas in Indonesia after they are put into operation.
In addition, in order to reduce the cost of living of the people and consolidate the fundamentals of consumption, the Indonesian government has cancelled the income tax on sugar products from June 9 to ensure that the government procurement price is maintained at 9,700 rupiah (approximately 69 US cents) per kilogram. In order to improve the investment environment and increase the intensity of investment, the Indonesian government will give preferential policies to halve corporate tax within 5 years for investment in priority development industries within the range of IDR 100 billion to IDR 500 billion, covering manufacturing, petrochemicals, pharmaceuticals and pharmaceutical raw materials , Semiconductor, electronic accessories and other industries.
Expected to achieve rapid growth
In terms of debt, a report from the Indonesian Ministry of Finance shows that although the rupiah has depreciated more than the target set by the National Budget in 2018, adding a certain burden to government debt interest payments and imported energy subsidies, it has not yet managed the country’s finances. The implementation of the budget has a major impact; despite the rapid expansion of government debt, tax performance and expenditure efficiency have improved. With large-scale infrastructure and social welfare projects progressing smoothly, the overall performance of the government’s finances is still improving. In terms of investment, Santosuo, the head of the Indonesian Financial Services Administration, stated on July 25 that the pressure on the financial market will not last too long. The domestic and foreign financing of Indonesia’s strategic infrastructure projects is progressing smoothly. These large-scale projects are reducing unemployment and improving interconnectivity. The role of interconnection, stimulating economic growth, and consolidating economic fundamentals has become increasingly apparent.
The international market, especially the financial sector, has recently responded positively to the aforementioned macro-control policies in Indonesia. The International Monetary Fund recently issued a statement stating that the Bank of Indonesia’s interest rate hike and exchange rate intervention operations are appropriate. They will not only help Indonesia to cope with capital flight and currency depreciation, but also help resolve global markets due to the strengthening of the U.S. dollar, rising global interest rates, and rising crude oil prices. The potential inflation risk caused has a positive effect. In its latest "Indonesia Economic Quarterly Outlook", the World Bank believes that the investment-driven fundamentals of the Indonesian economy are sustained and stable. The scale of new fixed assets in fields such as machinery and equipment, motor vehicles, etc. hit a five-year high.
The Bank of Indonesia predicts that the economy is expected to achieve 5.2% growth throughout the year. 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. The weakening of the Indonesian rupiah also has a certain role in promoting exports; large-scale fiscal investment in infrastructure construction has driven the private sector. Sectoral investment has expanded, and investment-driven growth has become increasingly apparent. World Bank senior economist Derek believes that if the advantages of investment, productivity, human resources and other long-term stimulating economic growth factors can be used, Indonesia's economic growth rate is still expected to reach 5.3% this year.