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.

Jakarta Post

Discourse: 'Indonesia still has much room to grow'

Destry Damayanti (JP/Wienda Parwitasari)Bank Indonesia (BI) has lowered its benchmark rate by 50 basis points (bps) since July this year amid potential turbulence in the global economy, which prompted central banks around the world to shift to easing mode

The Jakarta Post
Mon, September 16, 2019

Share This Article

Change Size

Discourse: 'Indonesia still has much room to grow'

Destry Damayanti (JP/Wienda Parwitasari)

Bank Indonesia (BI) has lowered its benchmark rate by 50 basis points (bps) since July this year amid potential turbulence in the global economy, which prompted central banks around the world to shift to easing mode.

Such a move is part of the central bank’s “policy mix” to maintain economic stability and achieve its economic growth target of between 5 percent and 5.4 percent, despite growing uncertainty in the global economy.

The Jakarta Post’s Esther Samboh and Marchio Irfan Gorbiano recently talked to BI’s appointed senior deputy governor, Destry Damayanti, on the central bank’s policy stance, among other topics. Below is an excerpt from the conversation, edited for length and clarity.

Question: What is your general view if — in a worst-case scenario — the world headed into a recession and the impact it would have on Indonesia?

Answer: I foresee that the global economy would enter a slowdown phase. Because we see that in developed countries, they don’t have a supportive demographic structure, as most countries have an aging population, which generally causes declining productivity and low spending.

Second, if we look at developed economies, they already have adequate infrastructure, which is different compared to emerging markets, including Indonesia, where the need to build [infrastructure] is still huge and, therefore, still has large room to grow. So, they need to move beyond that if they want to increase their growth. That would need to be supported by strong human resources, while currently they have an aging population.

That means in the long run, we cannot see the economies of developed countries accelerating. They will enter a new equilibrium phase with moderate growth. So, I don’t see us entering a global recession. But there will be policy easing, yes.

The United States Federal Reserve has few options but to cut its rates, while European countries have wide fiscal deficit, with most of their spending directed toward social spending. That in turn would further deleverage their growth.

The volatility would be greater to Indonesia because it would hurt our commodity-based exporters, because commodity prices will be going nowhere and it will also hurt our external sector.

We also cannot hope for much from the manufacturing sector because there will be lower demand from developed countries. Moreover, countries are pushing to protect their domestic economy. The US has already done that, Europe as well. This will make it difficult for us to penetrate their market.

On one hand, we need to focus on our domestic economy. And we still have a supportive demographic structure dominated by the younger generation, while we still have room to grow. But challenges remain in investments.

What are BI’s coordination efforts to address the issues?

It revolves around making truly applicable policies, because many policies — not only from BI, including ministerial policies, are not applicable. For example, the domestic non-deliverable forward [DNDF]. We had been hopeful for such an instrument for a long time. When I was still with Bank Mandiri, we already said BI needed to provide hedging instruments. But that is a derivative product and after the 2008 crisis we were reluctant to use such products, even though it was important.

The DNDF was rolled out last year and Alhamdulillah [thank God] the market responded well and BI consistently maintained the product, because we require foreign debts to be hedged.

We also have financial instruments that we’ve developed and we’ve already had discussions with the market, because we cannot issue regulations that the market does not need.

Second, the inflation control team in the regional [TPID] and central governments [TPIP]. Many people wondered why BI bothered taking care of chili and so on. But the fact is that inflation in Indonesia is not just a monetary problem. There are problems in the real sector and the supply side as well.

With the TPID team, the regional governments felt greatly assisted. The regional governments are happy that BI has resources in the regions that constantly monitor prices and also produce regional analysis.

We also have the rakorpusda. Because according to our vision and mission, it is clear that we cannot do it alone. BI cannot stabilize the rupiah alone because there are other factors that influence it, such as the current account deficit.

BI is not involved with the current account deficit because it’s related to the transactions of goods and services, meaning that it’s related to the ministries that handle the real sectors. But if it is not managed, at the end of the day it would spill over to the monetary sector, which is why BI has concerns despite not being able to really dig deep into the problem.

On the monetary policy, how much room does BI have to cut rates?

We factored in domestic and global aspects in determining our policy. In the latest data, the growth of nonfarm payroll in the US was not good, proving that the US is heading for deceleration.

Europe would also head for easing but it doesn’t have much ammunition, considering its interest rate is already low, while its fiscal deficit is large. We see the easing stance from the external environment. Domestically, BI stated the latest rate cut decision was influenced by three factors.

First, inflation is stable at our target range of 2.5 percent and 4.5 percent. Second, we still see that our yields are still attractive, with the spread of our seven-day reverse repo rate with the Fed’s interest rate still wide and our credit default swap also declining. Our positioning with asset class abroad is not bad. That is why we are confident about cutting rates.

Third, preemptive. BI Governor Perry Warjiyo said BI’s policies would be preemptive because we are forward looking, ahead of the curve and frontloading.

We see that conditions will be tough going forward, meaning that our stance for policy easing will remain as is.

But does policy easing have to always mean rate cuts? Not necessarily, because we have policy mix. We could tweak the LTVs for certain sectors, or we could also cut rates again. We can do that as we still have room for it.

{

Your Opinion Matters

Share your experiences, suggestions, and any issues you've encountered on The Jakarta Post. We're here to listen.

Enter at least 30 characters
0 / 30

Thank You

Thank you for sharing your thoughts. We appreciate your feedback.