Early 2020 Double Jackpots
YEAR of 2020 arrived with a pair of boons for Indonesia. Firstly, the US-Iran war does not come yet, and the oil prices does not tapered off.
Indonesian government bonds—both rupiah denominated bonds valuing Rp20 trillion and global bonds worth US$2 billion and 1 billion euros—have sold out with lower coupons. Secondly, the US-China trade war has also deescalated. Both parties signed an agreement on January 15. As global trade is no longer hampered, investors can look forward to a faster-moving world economy.
The positive effects of those boons has been felt. The flow of incoming dollars from bond sales has steadily boosted the rupiah. This flood of dollars is apparent from the position of foreign ownership in government securities, which as of January 15, 2020 stood at Rp1,055 trillion, almost Rp20 trillion more compared to its position at the start of the year. It is not surprising that the rupiah was strong at Rp13,650 per US dollar since last weekend. This is the rupiah’s strongest position since February 2018.
An optimism also contribute to the rupiah’s rise. The market is confident that if the US-China ceases their stranglehold in the trade war, the prices of various commodities will be better. For Indonesia, which still bearing the burden of a current account deficit, higher commodity prices will increase dollar earnings from exports. As a result, the current account deficit can be reduced.
Commodity prices cannot be separated from China’s economy as the primary consumer. Because it was hit by the trade war, China economic growth has been slowed down. Latest data released on Friday indicates that China’s economy only grew by 6.1 percent throughout 2019, its lowest growth in the last 29 years. If the trade war with the US is stopped, there is hope that China’s economy can grow faster, which in turn it will crank up commodity prices.
The problem is, for Indonesia, the rise in commodity prices can be a double-edged sword. Commodity prices tend to go in tandem with oil prices. Indeed, the rise and fall of oil prices and the balance between supply and demand also depend on many other factors such as the Middle East situation, or how fast the expansion of US oil production. Oil prices, however, also correlate positively with Chinese economic growth: faster growth means more demand for oil.
Considering those factors, investors cannot expect a smooth sailing throughout 2020. This country’s dependence on oil imports is a weight that cannot be removed. The probability for a US-Iran war has indeed diminished, because Iran is occupied with domestic and international pressure for erroneously shooting down a Ukrainian civilian aircraft, killing 176 people, with Iranian citizens included among the victims. However, if Iran’s leaders manage to deal with this backlash and back to focus on confrontation against Donald Trump, the negative effects can hit Indonesia’s economy as well as the rupiah when oil prices skyrocket.
In these volatile conditions, it is very crucial for the government to focus on attempts to strengthen economic fundamentals. One such attempt might be implementing various policies that push export earnings. Another might be putting extra effort to attract investment—with the caveat that the investment goes into the productive real sector. If they can significantly boost exports, all the better.
It would be a disaster if the investment is misallocated into unproductive mega project like the construction for a new capital—an endeavour that seems to have become President Joko Widodo’s obsession. Instead of immediately improving on fundamental economic conditions, this mistake will bring many big problems for Indonesia in the future.