TEMPO.CO, Jakarta - PERRY Warjiyo, 59, is like a new captain directly encountering stormy waters. When he was installed as governor of Bank Indonesia (BI) on May 24, the rupiah was at the level of Rp14,205 per US dollar based on the Interbank Spot Dollar rate. It was the lowest rupiah exchange rate since December 2015.
The man born in Sukoharjo, Central Java, moved fast. Only five days after the Board of Governors' Meeting (RDG) under the previous governor, Agus Martowardojo, Perry convened an additional RDG on May 30. Perry raised the BI benchmark rate to 4.75 percent after Agus had increased the reference rate to 4.50 percent.
One day after the interest rate hike, the rupiah rose to the level of Rp13,951 per dollar. Since Perry's inauguration, the rupiah has also undergone appreciation. The market calls it the 'Perry Effect'. Hearing this term, the former executive director of the International Monetary Fund (IMF) laughed. "It's the 'Allah Effect'. Perry is just a small thing," he said in a special interview with Tempo by the end of last month.
The former BI deputy governor since 2013 received Tempo journalists Reza Maulana, Angelina Anjar andGhoidaRahmah following a meeting with the Budgetary Agency at the House of Representatives (DPR) building, Jakarta. On that occasion, Perry also explained the direction of BI policy under his leadership, which is pro-stability and growth. "Bank Indonesia has five remedies for this," he indicated.
Do you see the rupiah exchange rate drop as a difficult challenge in your new office
I'm not new with Bank Indonesia. During the crisis of 1997-1998, I was attending an educational program (at the BI Executive School) and during the 2007-2008 crisis, I was an executive director of the IMF. They were all important lessons for me: viewing the impact of global crises on developing countries, including Indonesia. From that experience, I've drawn a conclusion that there are three keys to a country's resilience in the face of external pressures.
What are they?
First, it's the conviction that our economy is healthy. Second, it's the courage to adopt the policies required, which are sound and preemptive. If you live under uncertainty, don't linger over it. You have to preempt the uncertainty. Third, there should be clear and intensive communication. Why? While under pressure, conflicting information will spread. The widespread distribution of information tends to result in irrational expectations. Therefore, communication is needed to overcome the information gap so that expectations will get more rational.
What have been the causes of the recent rupiah fluctuations?
Three aspects have changed the global economic and financial landscape lately. First, the Fed's [US Federal Reserve] leadership replacement and its interest rate policy. Actually, the Fed's interest rate policy has been noticeable since the time of Janet Yellen. But since Jerome Powell has taken over the Fed's leadership in February, we should also observe the tone of communication. The market predicts that the Fed will not only raise its interest rate three times but four times.
What are the others?
US President Donald Trump has launched an expansive fiscal policy such as tax reductions so that America's fiscal deficit this year is expected to rise by four percent. It increases the interest rate of US government bonds. Lastly, there is tension in the US-China trade relations and an upheaval in Europe. This makes the premium of global financial risk increase so that it is proper for investors to withdraw their funds from other countries, especially emerging markets, and place them in America. What's more, the dollar is strengthening.
Is Indonesia's economic condition today strong enough to face exchange rate fluctuations?
In my view, our economic condition is healthy. Compared with the periods of the Greek crisis, the growth revision of China in 2015, or Brexit (Britain's decision in 2016 to leave the European Union), our condition is stronger. We're more resilient. At present inflation is only 3.4 percent. During the economic turmoil of 2013, inflation reached 8.3 percent. In the first quarter of 2018, the current account deficit was only 2.1 percent, whereas in the second quarter of 2013 the current account deficit was 4.2 percent. Our banks have sufficient capital. Foreign exchange reserves are also far higher.
But the rupiah exchange rate has touched the lowest level in the last two and a half years.
The exchange rate will always move according to the market mechanism. From day to day there are indeed technical factors affecting it. But what happened recently wasn't due to our economic fundamentals or technical factors. It was more triggered by expectations. I mean that the exchange rate was overshooting-weakening quite deeply, pushed by expectations from a number of analyses and players, 'Oh, the rupiah rate can reach Rp15,000. Oh, it can be Rp17,000.' In my opinion, these expectations weren't based on appropriate economic and financial assessments. But no need to say whether they were right or not. By adopting a concrete and bold policy, people won't believe such expectations.
What's the BI policy to stabilize the exchange rate today?
We should have the courage to espouse the policy needed. If the US interest rate rises faster than predicted, it's reasonable for us to make adjustments.
Read the full interview in this week's edition of Tempo English Magazine