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Jakarta Post

Export more, or suffer more


    The Jakarta Post

Jakarta   /   Wed, May 9, 2018   /   08:04 am
Export more, or suffer more First shipment: Hongthai International, a company operating in the Special Economic Zone (KEK) of Palu, Central Sulawesi, began exporting pine sap products to Guangzhou, China, via Pantoloan Port in Palu in December 2017. (JP/Ruslan Sangadji)

The 5.06 percent economic growth in the first quarter, as the Central Statistics Agency announced on Monday, was lower than the government estimate of 5.4 percent, Bank Indonesia’s estimate of 5.1 percent and the 5.18 percent analysts had projected. This makes it all the more imperative to go all out in boosting exports to defend the rupiah, which has lost almost 4 percent of its value against the US dollar in the first four months of this year alone.

Optimists may argue that the 5.4 percent growth target for the year could still be realized, taking into account the robust private consumption expected during the Ramadhan fasting month, which starts next week, and the midJune Idul Fitri holiday. Another boost is expected from political campaign spending and logistics for the June 27 legislative elections in 171 regions, as well as in preparation for the April 2019 general election.

Household spending usually increases during Ramadhan and the Idul Fitri festivities. But the market perception on Indonesia’s economic fundamentals may not be strong enough to prevent reverse capital flows if the United States Federal Reserve raises its interest rate sooner than expected.

The Fed rate is now 1.75 percent. Assuming US inflation of 2 percent this year, the central bank may raise its rate to 3 percent. The question now is whether the Fed will hike the rate only two more times for the rest of this year, as it has often said, and set the rate at 2.25 percent.

If the US macroeconomic condition allows for a fasterthan-planned pace in its rate hike, Bank Indonesia may find itself in a dilemma, because the interest rate differential between dollar and rupiah assets would widen, especially if Indonesia’s inflation rate exceeded 4 percent. The BI rate now stands at 4.75 percent.

Given the large foreign investment portfolios in the government bond and equity markets, the risk of a sudden capital outflow is relatively high. Hence, it is most imperative for the government to maintain the inflation rate below 4 percent. In this context, we also understand why the government has decided to control fuel prices amid the international market uncertainty, at least for the time being, instead of allowing fuel prices to float fully on international market quotations.

But this is not enough. The government should go all out in bolstering exports to raise dollar liquidity for the economy. The government also should go the extra mile to build a more positive public opinion on its economic policies, in an effort to counter the mounting political noise in the run-up to next month’s regional elections and next April’s general election.

Inordinate nationalistic sentiments always raise their ugly heads during an election year, often resorting to the bashing of alleged “foreign investor dominance” in exploiting the country’s natural resources. The recent outburst against the government’s operational directives for managing foreign worker employment is an example how a good policy, when it is not introduced through good communication, could be manipulated by its critics to fabricate a negative opinion on the government.