Robert F. Engle III - JP/Wendra Ajistyatama

As the global financial market grapples with rising volatility, emerging markets are very vulnerable to capital outflows and Indonesia is no exception, a Nobel laureate has warned.

The unexpected victory of the Republican candidate Donald Trump in the United States presidential election last year pushed markets out of the safe zones seen just weeks before, a reminder that financial stability will always be accompanied by risks, the 2003 Nobel laureate in economics Robert F. Engle III said in Jakarta on Wednesday.

“Financial stability does not operate without risk. In fact, financial markets depend on risk,” said Engle in a public lecture titled “The prospect for global financial stability” at Atma Jaya Catholic University.

Speaking to an audience of hundreds, the finance professor at New York University’s Stern School of Business suggested that preventive measures would be better than a rescue and sound regulations in the financial sector could serve as the key to safeguarding a country from risks.

In a press briefing after the lecture, Engle said given that surprising moves by the Trump administration might intensify in the next four years, Indonesia needed to boost government spending on projects that could support economic growth, such as infrastructure development and improvements in education, while at the same time lowering the budget deficit.

In addition to this, as the country had a tight fiscal capacity, the government also had to invest in projects that could generate sizeable tax revenues, including those that attracted foreign direct investment, with the future possibility of multiplying such income.

Coping with Trump’s antiglobalization sentiment on trade, Engle further suggested that Indonesia seek alternative trade partners with similar characteristics to the US, such as developed countries in East Asia and Southeast Asia, as well as non-traditional regions like Latin America and Australia.

Engle, a member of the Vienna-based International Peace Foundation’s advisory board, also shared his thoughts during a similar event previously held at Airlangga University in Surabaya, East Java.

The university awarded him a doctor honoris causa for his contribution to the world economy through the path-breaking creation of methods that can analyze movements and trends in the financial market, including those of stock prices and other financial variables, and therefore provide more accurate market predictions.

In his remarks at the Jakarta event, Bank Indonesia (BI) senior deputy governor Mirza Adityaswara noted that the central bank performed periodical top-down stress tests as part of systemic risk assessment, quite apart from setting credible policies to reduce the negative impact of global uncertainty.

“The stress testing takes into account the effects of extreme but plausible macroeconomic events and their impact on the banking system,” Mirza said, adding that BI routinely coordinated with the government and financial regulators under the Financial System Stability Committee (KSSK).

Mirza pointed to the prospect of an improved global economy on the back of a recovery in commodity prices, which could boost exports, as well as healthier balance sheets in domestic banks, which could help increase lending, while also acknowledging exchange-rate pressures.

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