Three Questions for Confidence
Yopie Hidayat (Contributor)
WHEN the United States Federal Reserve decided that interest rates were not going up until 2023, it should have been a second wind for the rupiah. That was the decision of the Federal Open Market Committee meeting on Wednesday, September 16. As long as the unemployment rate in the US has not reached the lowest point and inflation has not surpassed two percent in a certain time period, the interest rate will remain where it is now.
The probability of the rupiah appreciating should be in line with analysts consensus, according to a Bloomberg survey. The rupiah will appreciate going into the end of the year. Optimistic estimates even predicted the rupiah to reach Rp14,300 per US dollar, much stronger than its current position of around Rp14,800.
Optimism at the rupiah reflects high expectations about the Indonesian economy. Indonesian economic growth might be negative this year, but not by too much. Asian Development Bank projects that Indonesian economy will only contract by one percent in 2020. This is far better than neighboring countries or fellow emerging markets, except for China which seems able to recover faster.
But it is too early to celebrate. Optimism does not turn into reality by itself. There are three important issues that will decide the trajectory of Indonesia’s economy until the end of the year, and even far into the future. If the answers to those three problems do not satisfy the market, investors will not come. The rupiah will not appreciate as predicted.
The first issue concerns the Covid-19 pandemic. While observing Covid-19 in Indonesia, investors are not only focusing on the rising number of new cases. An important indicator that has drawn their attention, and is incidentally very poor in this country, is the positivity rate. That is, the percentage of those infected with the virus that are detected compared to the number of total tests. That number is still at 15 percent, far above World Health Organization’s safety threshold of five percent.
For the market, the debate between the central and regional governments about the original or transitional versions of the Large-Scale Social Restrictions (PSBB) policies only adds to the confusion. As long as the positivity rate is high, and especially when hospital beds are far over capacity, that is a bad sign. In conclusion, Indonesia has failed in their response to Covid-19 and will be further distanced from international relations. How is the economy supposed to grow if Indonesia cannot mingle with other countries because they are afraid of interaction?
The second question that casts doubt on Indonesia is: how governments will handle the budget deficit next year, and the years after. President Joko Widodo’s statement at the Bogor Palace in early September is still fresh on the market’s mind—the government will ask Bank Indonesia to keep funding the budget until 2022.
Direct funding from Bank Indonesia makes the market very uncomfortable. Investors who will invest in Indonesia through various rupiah instruments will not want to see their investments lose value because the central bank keeps printing rupiah to help the government. There is no clear answer for the question: until when, and is there a limit? Clarifications from the fianance ministry and Bank Indonesia have not settled the matter.
The third problem is the plan to change various regulations that will diminish the authority and independence of Bank Indonesia. The same as the second question, only normative answers are being provided. Meanwhile, the stream of mixed information regarding the plan to revise the law ruling the central bank and the issuing of government regulations to replace the constitution are going strong.
These three problems loom over the market, waiting for clarification. That is why the rupiah only moved slightly at the end of the week, instead of immediately appreciating as it always has been when there is news that US interest rates are going down. And this time the signal is far stronger: the Fed has virtually guaranteed that dollar liquidity will stay abundant at cheap prices for a long time. The government would do well to cast some light on these three issues before market confidence in Indonesia becomes even more shaken.