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Facing the '€˜new normal'€™

  • J. Soedradjad Djiwandono

    The Jakarta Post

Singapore | Fri, August 14, 2015 | 10:09 am
Facing the '€˜new normal'€™ Harvesting uncertainties: President Joko “Jokowi” Widodo (left) listens to West Java Governor Ahmad Heryawan during a rice harvest in the Indramayu regency. Indonesia is bearing the brunt of low growth and increasing uncertainty in the world economy.(Courtesy of Presidential Office/Cahyo) (left) listens to West Java Governor Ahmad Heryawan during a rice harvest in the Indramayu regency. Indonesia is bearing the brunt of low growth and increasing uncertainty in the world economy.(Courtesy of Presidential Office/Cahyo)

Harvesting uncertainties: President Joko '€œJokowi'€ Widodo (left) listens to West Java Governor Ahmad Heryawan during a rice harvest in the Indramayu regency. Indonesia is bearing the brunt of low growth and increasing uncertainty in the world economy.(Courtesy of Presidential Office/Cahyo)

It is a bit unfortunate that, at the time we celebrate the 70th anniversary of our independence as a free nation, Indonesia has to face some economic realities. Most of these issues are not reasons for celebrating, and there is no choice but to confront them head on.

The recent developments in economics and finance are challenging as well as interesting. These developments have given rise to anxiety and nervousness, possibly leading to sleepless nights for those responsible for investment, debt finance or economic stability.

The World Economic Forum in 2011 identified five clusters of risk, i.e. economics, social, geopolitics, climate change and technology. It appears that in most of these clusters, levels of risk have been high and increasing. Examples of such risk include the volatility of commodity prices and currencies, the increasing inequality of income distribution, migration problems, terrorism and armed conflict, natural disasters and heat waves, cyber-crime and computer glitches that have occurred at various times around the world.

The above developments have caused, or at least exacerbated, problems encountered by many advanced, emerging and developing economies. The global economy was saved from plunging into depression in the aftermath of the global financial crisis of 2008/2009, partly thanks to the imaginative and unconventional fiscal and monetary policies launched in tandem with financial reforms. Nonetheless it was arguably inevitable that a long period of severe recession could not be avoided, thus the emergence of the '€œgreat recession'€. In fact, cases of low economic growth combined with high unemployment and possibly deflation appear to have become the '€œnew normal'€.

The International Monetary Fund (IMF) recently revised downward its estimate on world economic growth for 2015 as reported in the World Economic Outlook (WEO) of April 2015, from 3.5 percent to 3.2 percent. In fact, the US has had the most promising news on growth among all the advanced economies. Growth has been low globally and slowing for the EU, Japan and the others. And even the good news about the US economy has some potentially adverse implications as it may trigger a US Federal Reserve (Fed) decision to implement a program of raising Fed rates resulting in capital reversal from emerging markets.

An even more discouraging development has been the recent weak growth levels of emerging economies. The economic growth rates of Brazil, Russia, India, China and South Africa (BRICS) have been disappointing, particularly for Russia and Brazil. Only India remains promising. But, of course, the biggest concern pertains to the second-largest economy globally, China. The rebalancing policy of China'€™s economy toward greater reliance on domestic consumption has been bad news for natural resources export-oriented economies, including Indonesia. The commodity boom is now over, together with the era of China'€™s double digit economic growth.

At the same time, recent developments in monetary and finance have been dominated by the confusing process of seeking agreement for a third Greek debt bailout. The most we could say at the moment is that the drama seems to be over and the '€œGrexit'€ did not happen. But has the possibility really gone for good? Arguments stating that Greece would be better off to leave the monetary union, even temporarily, continue to be aired.

For sure, the hardship from the austerity measures demanded by the creditors will continue to concern the Greeks for some time to come. Questions persist as to whether the eurozone can last. And to complicate matters, the IMF has officially stated that it cannot participate in the third bailout because, in its opinion, the debt (of over US$300 billion for its 11 million people economy) is basically unsustainable despite the promise by the Greek government to accept reforms. The IMF management has instead proposed a large economic haircut to ameliorate this situation.

Of course, the question of the timing and extent of any increases in the Fed rate from near zero over the last six years remains a challenge to everyone in the currency market and to monetary authorities. Even IMF managing director Christine Lagarde felt the need to remind the Fed of the disturbance that such decisions may cause to the value of currencies of emerging economies, a disturbance similar to the '€œtapper tantrum'€ that emerged in the wake of Fed chairman Ben Bernanke'€™s announcement of the possibility of the Fed raising interest rates in June 2013. For now, the markets seem to believe that chairwoman Janet Yellen will commence the process of rate hikes later this year.

Another ongoing drama has been the performance of the Chinese share market since its sudden and rapid drop in June 2015. Concerns have not only arisen from share price volatility and the associated loss of wealth, but also from measures employed by Chinese authorities in addressing the problem. Examples of heavy-handed state intervention have included direct intervention in the Chinese stock exchange in stopping new IPOs, the prohibition of short selling and terminating the trading of a huge number of stocks. Aside from the fact that these efforts enjoyed only partial success in easing the volatility, the more serious matter is that tinkering with the share market is contrary to the practices of a free market.

The last area to mention here is that developments in finance and banking have been influenced by the implementation of unconventional monetary policy, especially the zero interest rate policy and quantitative easing in different forms as practiced by the Fed, the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ).

In response to the global financial crisis and the ensuing '€œgreat recession'€, regulatory and supervisory authorities have sought to influence developments in the banking sector in the course of developing a financial framework conducive to sustainable development. This process has involved debate on the implementation of certain aspects of the Dodd-Frank Wall Street Reform and Protection Act, such as the Volcker Rules, as well as the Basel III framework. These reforms have largely been aimed at strengthening capitalization of financial institutions and the separation of retail banking from investment banking.

Despite these measures, the 2008 global financial crisis, followed by the '€œgreat recession'€ and continued with the most recent Greek debt crisis, have weakened governance at the regional, national and global levels. Global economics and finance have become characterized by high levels of uncertainty and risk. This appears to be the '€œnew normal'€ faced by the world today.

For Indonesia, the concern is not just diminished global growth but also the '€œslowing growth-cum-rebalancing'€ policy of China'€™s economy. China served as an economic savior during the aftermath of the global financial crisis thanks to its investment-supported double digit growth that in turn led to a huge demand for natural resources and commodities. More recently, Beijing'€™s rebalancing policies have shifted the source of growth from expenditure on infrastructure investment to domestic consumption. The challenge facing Indonesia now is that Indonesia has still a long way to go before it can be a part of the supply chain of the type of goods and services that will meet China'€™s new consumer demands.

The good news is that several of Indonesia'€™s finance and banking fundamentals are sound. Meanwhile, the recent rapid depreciation of the rupiah compared to the currencies of other emerging economies is a threat that authorities should not take lightly. Emerging economies are often susceptible to substantial reversals in capital flows, especially when markets continue to speculate as to when the Fed will raise its rate and by how much.

The market is likely evaluating the relative position of Indonesia to other economies, including comparing the size of deficits in the balance of payments, examining the consistency of economic and financial policies, as well as assessing the general level of confidence in the economic and political management of President Joko '€œJokowi'€ Widodo'€™s administration. With regards to the latter, it is inadequate for the government to say that we are not alone in currency depreciation, or that the problem is the strength of the US dollar and not the weakness of the rupiah.

Unfortunately there is no magic formula to manage an economy facing various uncertainties like those Indonesia is currently facing. The best defense in the face of a flu epidemic is that one should be in good health. But a healthy body cannot be acquired overnight by pumping it with supplements or vitamins; it is a result of prolonged investment in health. Economics is no difference.

In the face of uncertainty, there is no room for complacency and a '€œbusiness as usual'€ attitude. Any measures that the market perceives to be inconsistent, shirking responsibility, arbitrary or panicky is a recipe for failure. We have to face the '€œnew normal'€, and the economic climate of increasing uncertainty, with eclecticism, nimbleness and flexibility.
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The writer is emeritus professor of economics, University of Indonesia and professor of international political economy, S. Rajaratnam School of International Studies, Nanyang Technological University.

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