QE, which injected billions of dollars into the economy, provided a boost to the global economy and capital markets around the world. But what happened then was extraordinary, because mere talk of tapering QE by the Fed’s chairman resulted in disastrous effects on emerging economies.

This episode, which was dubbed the “taper tantrum”, generated turmoil in the Indonesian economy. There was a huge capital outflow, with foreign direct investment plunging from US$5.3 billion in the third quarter of 2013 to just $500 million in the fourth quarter of that year.

Over the same period, portfolio investment dropped from $7.6 billion to $3.3 billion. Exchange reserves fell from $108 billion to $93 billion. The rupiah depreciated by 20 percent against the US dollar. Economic growth slowed to 5.8 percent in 2013 after reaching a record 6.5 percent in 2011.

And now that the US economy is recovering strongly amid the pandemic, speculation that the Fed will taper off QE has begun to emerge. The market generally believes that the huge $1.9 trillion US fiscal stimulus and President Joe Biden’s proposed spending on infrastructure would spur rapid economic recovery and overheating. As inflation rises and the labor market tightens, the market doubts that the Fed would maintain its current loose monetary policy, and many believe that at a certain point, the Fed would tighten its policies by raising the benchmark rate and unwinding its asset purchases. These kinds of uncertainties have triggered market volatility recently.

According to Bank Indonesia (BI) there was a capital outflow of $1.6 billion in the first two weeks of March, after a surplus of $7.1 billion in the previous two months. The Jakarta Composite Index (JCI) was down 4.1 percent, and the rupiah depreciated by 3.5 percent against the green back. 

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