TINA, Don’t Fight The Fed
Yopie Hidayat (Contributor)

THE United States dollar remains the only option for a global currency. There is no alternative (TINA). Also, do not go against The Federal Reserve. These are the two main doctrines that move financial markets these days.
Therefore, even as dozens of cities in America go up in flames, the market does not care. Even if negative growth is possible this year and thousands of companies will go bankrupt, the trend for stock prices in the New York Exchange is still rising. The S&P 500, as of June 5, was already sitting at 3,193, approaching its pre-pandemic levels.
Indeed, the market will not dare to speculate against The Fed, which is on standby to keep the financial industry from collapsing. It has unlimited ammunition. The Fed is prepared to print as many dollars as it needs. It is in the middle of a big gamble. At stake is not only the reputation of the dollar and the American economy, but also the global financial system.
Until Friday, June 5, the gamble on unlimited liquidity injection was still able to prevent financial market collapse. As of June 3, The Fed’s balance total has reached US$7.21 trillion, compared to its mid-March position of US$4.31 trillion.
Such a large inflow of money in such a short time has resulted in a flash flood of dollars that is spilling over everywhere, including Indonesia. Since the end of last month, Indonesia financial markets have enjoyed positive sentiments after being shadowed by the ill omen of Covid-19 for so long.
In the exchange, the composite stock price index jumped by 4.9 percent last week, which ended on Friday, June 5. In the same period, Rp3.39 trillion of foreign funds entered the exchange. In the bond market, foreign funds invested in various government bonds jumped to Rp938 trillion as of June 4, increasing by Rp21 trillion in two weeks.
The flood of dollars is also bolstering the rupiah. Last weekend, the rupiah has returned to its position before the pandemic, hovering around Rp13,900 per US dollar. This positive sentiment must be like a refreshing gust of wind to investors.
Do not be satisfied just yet. The market is indeed enjoying a liquidity flood from The Fed. A pleasant surprise also came from the US job market. Unemployment figures dropped to 13.3 percent, down from its previous position at 14.7 percent. Unemployment rate is one of the fundamental factors that are critical in reading US economic trends. An additional 2.5 million workers getting jobs throughout May can be seen as a sign of the start of US economic recovery. At least, the effect of Covid-19 is not as severe as previously estimated.
By contrast, in Indonesia, there are no strong signals that show improvement of fundamentals. The government has gradually reopened some public activities. There are hopes that the economy will show signs of life soon. But how big the effect of the reopening is not yet apparent.
On the fiscal side, there is news that can bring in negative sentiments. The government is forced to once again restructure the budget that was just revised last month through the Presidential Decree No. 54/2020. Latest estimates show the budget deficit ballooning to Rp1,039 trillion from Rp853 trillion. Earnings are falling while spending for measures against Covid-19 is rising. Not to mention the need for economic recovery programs, and capital injections as well as bridging loan for state owned enterprises that are reeling. Such a large deficit is a threat to the government budget credibility.
On April, ratings agency S&P Global conveyed its viewpoint. The soaring budget deficit and the burden of debt can create terrible consequences for Indonesia. Its investment-grade rating can be lost. And when that happens, the flood of dollars will immediately ebb away and return home.
Not only that, interest payments for new debt that burden the government will also rise. The deficit grows in turn, and the government will be forced to take on more debt. This is the vicious cycle of debt. The government must try with all its might to not succumb to it.