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Are Jokowi and his Cabinet ready for the impending crisis?
The signs are familiar and are reminiscent of the financial meltdowns Indonesia went through in 1998 during the Asian financial crisis and in 2008 during the US subprime loan crisis
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The signs are familiar and are reminiscent of the financial meltdowns Indonesia went through in 1998 during the Asian financial crisis and in 2008 during the US subprime loan crisis. President Joko 'Jokowi' Widodo and his Cabinet should be fully on guard regarding three major storms threatening the Indonesian economy: the free fall of the rupiah and stock prices; plunging oil prices; and the deepening of China's economic slowdown.
The memory of the 1998 crisis came alive as the rupiah nosedived for several days. Last week, its value against the US dollar neared Rp 14,000 on Aug. 21, the lowest level since February 1998.
Bank Indonesia (BI), the central bank, has been trying hard to withstand the rupiah fall, but so far to no avail. Several regulations that it has issued to contain the rupiah slide ' obliging exporters to deposit their receipts in domestic banks, requiring the use of rupiah for domestic transactions, lowering the minimum dollar purchases without underlying transactions from US$100,000 to $25,000, offering more attractive deposits to attract excess rupiah liquidity ' are trivial measures and the effects would only be marginal.
BI's ability to execute major policy decisions has been restricted. This is because domestically it faces three conflicting objectives ' stimulating growth, containing inflation, arresting the rupiah slide ' that cannot be coped with simultaneously. It is as if BI is handcuffed, and external forces now control the fate of the rupiah.
For BI, its fight against the rupiah depreciation has been hard and costly. Its reserve has shrunk by $8 billion between February and July 31 because of its intervention in the market.
The rout in the Jakarta Stock Exchange (JSE) continued as investors resumed their stock sell-off more ferociously last week when they sensed that the fallout from China's slowdown would be worse than anticipated. As of Aug. 21, the Jakarta Composite Index (JCI) had lost 16 percent during 2015 and had tumbled 21 percent from its peak in April.
The turmoil in the market has wiped out nearly Rp 800 trillion of market capitalization in the JSX since June 2015. Without any changes in sentiment, the JCI could be heading toward 4,100, a level not seen since Sept. 6, 2013.
The fall in oil prices has not found the bottom yet. After rising slightly in previous months, oil prices slumped to $40 per barrel last week, the same level as April 2009. Only 15 months ago, oil prices still hovered around $100 per barrel. The massive oil glut is far from over as Saudi Arabia, the biggest producer, and American shale oil producers are still pumping aggressively in their oil wells.
The name of the game is defending market share. With its huge financial resources, Saudi Arabia could afford to undercut American producers and Iran, its main political rival, would see its oil flow back to the market once the sanctions are lifted following its nuclear deal with the US and other countries.
Is the $40 per barrel price sustainable? A certain grade of crude oil, Western Canadian crude, a heavier type of crude that is more difficult to refine, is currently trading in the $20 range. This has made some traders speculate that $15 oil per barrel is not impossible. This put into question the government's assumption on oil prices in the 2016 budget of $60 per barrel that is expected to raise Rp 85 trillion in oil and gas non-tax revenue.
Mystery sometimes creates fear. The financial market has been gripped by investor fear over what is really happening in China. The Chinese economy has been sluggish and the authorities have responded with simulative monetary and fiscal measures. They have made flexible their stock trading rules to prop up the plunging prices.
As if this is not enough, the Chinese authorities have to resort to substantial yuan devaluation. Does this indicate China's actual slow growth and the crisis is deeper than what is currently believed? How reliable are China's statistics? In any case if the suspicions are true then the effect would be more serious for developing economies, like Indonesia, whose exports are largely dependent on China's economy.
As the fate of major currencies is in the hands of the US Federal Reserve, the world is anxiously waiting for a signal on whether the Fed will indeed raise interest rates in September as has been anticipated. But the signals from the Fed have been mixed. Its minutes from its latest meeting displayed a split whereby some members felt that the strengthening of the US economy had warranted an interest increase, while other members cited the negative effect of the rate hike on the world economy.
Until the Fed gives a clear indication on the timing of its rate rise, currencies all over the world ' including the rupiah ' will fluctuate wildly.
Those developments portend another sort of crisis that could exact a heavy toll for the Indonesian economy.
To face the impending economic crisis, Indonesia needs a solid, well-functioning bureaucracy that can generate creative and bold policies. As a businessman, President Jokowi is fond of 'out of the box' solutions and in fact has suggested his ministers find 'out of the box' ways to address many problems.
Unfortunately his Cabinet is not the kind that he envisioned. His ministers' actions do not reflect a harmonious orchestra under a strong conductor. The recent spat between the newly appointed Coordinating Maritime Affairs Minister Rizal Ramli and Vice President Jusuf Kalla has poisoned the environment within the Cabinet, ruining any prospect of harmonious relations among ministers and preventing the creation of solid team work that is needed in the face of the impending crisis.
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The writer is a commissioner at a publicly listed oil and gas services company.
