Stabilizing Rupiah
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Kamis, 1 Januari 1970 07:00 WIB
TEMPO.CO, Jakarta - Besides relying on Bank Indonesia, the government needs to immediately implement policies to overcome fluctuations in the Rupiahs exchange rate against the US Dollar. Populist policies that do not take into account economic costs, but were simply drawn up for the sake of electoral politics, should not have been implemented.
Dependence on investment portfolios is the root cause of Indonesianeconomysvulnerability. The Rupiahs fluctuations were predicted long ago, and this is not the first time it has happened. The Rupiah began to fall as soon as foreign short-term investors began to leave the financial market in large numbers. This instability worsened because the current account, which has been in deficit since 2012, had been supported by this hot money.
At the end of last year, not long after the2018State Budget was passed with an assumed exchange rate of Rp13,400 to the US dollar, many economists - including cabinet members and a former minister - expressed concerns that the financial instabilities seen in 2013 and 2015 may recur. Minutes of the US Federal Reserve, which has a major influence on global financial markets, stated that the normalization of monetary policy would proceed in stages this year.
The rise in the benchmark Fed Funds Rate in March, along with the increase in US government bond yields, finally convinced investors to relinquish their portfolios in Indonesia. In the last five months, the net outflow of foreign investment from the stock exchange totaled Rp40 trillion. Most of this has been in the last three months. Meanwhile, the foreign net sell in the bond market was at Rp10 trillion.
The Rupiah fell to less than Rp14,200 to the US Dollar last Monday. This three-year low was reached only four days after Bank Indonesia raised its benchmark BI 7-day (Reserve) Repo Rate. Efforts to stabilize the Rupiah by injecting Rp50 trillion of foreign currency reserves also seem to have had no effect.
Adjusting interest rates again and intervening in the markets, as suggested by Bank Indonesia Governor Perry Warjiyo, could stop the Rupiah from falling further. But these short-term policies will not address the root of the problem, and may cause new problems. High-interest rates would stifle the economy, which in the last five years has seen a stagnant growth of around 5 percent.
This is why a comprehensive strategy is needed to tackle the current account deficit. It may not yet be possible to reduce the deficit now because the government's efforts to improve exports will not bear fruit in the short term. The budget deficit must, therefore, be used to improve productivity and quality-and maintain economic growth.
The government must reexamine policies that are inconsistent and counterproductive. Maintaining subsidized fuel prices and requiring Premium gasoline to be supplied to Pertamina, for example, will increase the volume of imported fuel. In the first quarter of 2018, the current account deficit for oil was US$4 billion, twice the figure for the same period last year. This type of policy is no different from what was seen when budgets were weighed down by subsidies.
President Joko Widodo must end these populist and unrealistic policies. Small but fundamental measures are needed in the strategy to overcome larger risks, such as the private sector's growing debts overseas. The US central bank has recently signaled again that it will more aggressively pursue monetary targets next year. The potential for similar, or worse, instability must be anticipated amid the political agenda for 2019.
