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Fed rate, Trump tax reform and Indonesian economy
But the external risk to the Indonesian economy has yet to be tested by the impact of the Fed’s plan to raise its benchmark rate three more times in 2018.
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Federal Reserve building. (Shutterstock/File)
T
he Indonesia Stock Exchange (IDX) closed 2017 with a big bang. On Dec. 29, the last day of trading, the Jakarta Composite Index (JCI) reached a record high of 6355.65.
It was higher than in China (6.6 percent), Singapore (18.1 percent), Malaysia (9.5 percent) and Thailand (13.7 percent). Out of that gain, a 6.8 percentage point increase was recorded in December alone.
This was unprecedented since it occurred amid concern over the negative impact of the rise of the United States Federal Reserve benchmark rate and after Bank Indonesia (BI) decided to maintain its policy rate.
The situation was very different from 2013, when the Fed announced possibilities of ending its quantitative easing policy, which meant it would start tightening its monetary policy.
This tapering talk had a significant impact on emerging market countries (EMC) including Indonesia. The taper tantrum — as it was then generally called — had caused the exchange rate to weaken dramatically in EMCs, their stocks and bonds were hit hard, triggering capital outflows to advanced countries.
In Indonesia, the rupiah depreciated 25 percent between May 2013 and February 2014. The JCI dropped 23 percent. Foreign direct investment plunged to a trickle at only US$0.5 billion in the fourth quarter 2013 from $5.8 billion in the third quarter.
Current account deficit soared to 4.4 percent of gross domestic product (GDP).
