TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Dealing with global uncertainty
The World Bank assessed Indonesia as wellpositioned to deal effectively with the risk of global financial and capital market volatility.
Change Size
The biggest threat to stability remains the risk of a steep oil price rise. (shutterstock/-)
T
he World Bank assessed Indonesia as wellpositioned to deal effectively with the risk of global financial and capital market volatility, which is still considered the biggest threat to macroeconomic stability as the faster-thanexpected normalization of the United States monetary policy could trigger portfolio capital outflows.
The second Indonesia Economic Quarterly report for 2018 issued on Wednesday commended Bank Indonesia (BI) for its sound and transparent monetary policy and the Finance Ministry for its prudent fiscal management despite the election year — when governments are usually tempted to expand populist programs and distribute political goodies.
BI made the right decision when it raised its policy rate by another 25 basis points at the end of May to 4.75 percent, the second increase within a month, as pre-emptive, frontloading and ahead-of the curve moves to strengthen stability, notably exchange rate stability, despite the low inflation.
BI has given the right signs that it will also continue to optimize dual intervention in the foreign exchange market and government securities market to stabilize rupiah exchange rates, adjust fair prices in the financial markets and maintain adequate liquidity in the money market.
Yet no less important is that the central bank also made its policy more transparent by intensifying communications with market players, the banking industry, business community and economists to form rational expectations, thus helping to mitigate the rupiah overshooting the currency’s fundamental level.
There is indeed no reason for inordinate concern about the outbreak of an adverse financial market condition as in the first half of 2013, which was triggered by the start of the United States Fed money tightening, because the economic fundamentals now are much stronger than those in 2013.
Indonesian macroeconomic fundamentals remain sound with the inflation expected within the target rate of 3.5 percent, plus or minus one percentage point, as inflation in May was only 0.21 percent, only half of the usual level during the annual season of Ramadhan. As a result of the low inflation, Indonesia’s real interest rate differentials versus the US stood at more than 300 basis points in May, providing protection against capital market volatility and mitigating the risk of capital outflows in the bond market. The interest rate differential is quite important as 40 percent of government bonds are held by foreign investors.
Moreover, the current-account deficit was checked at around 2.1 percent of gross domestic product (GDP) in the first quarter, only half the deficit in early 2013, while foreign exchange reserves were equivalent to more than eight months of imports and credit growth was only one third of the 22 percent expansion in 2013. The market will also be comfortable to learn from the current preparations for the 2019 state budget that the government would continue to strongly hold to the principle of conservative fiscal policy, despite the presidential and legislative elections next April.
The biggest threat to stability remains the risk of a steep oil price rise, because the government has decided to increase the volume of subsidized gasoline for this year by about 4.3 million kiloliters to 11.8 million.
