Overly Optimistic in Time of Volatility
Yopie Hidayat (Contributor)
USUALLY, political mayhem acts as a disruptive factor in emerging economies, throwing their financial markets into chaos. This time it’s a different story. A global market shock came from the United States, a country with a well-established political system and democratic tradition. The political uncertainty near the upcoming November presidential elections has caused a sharp rise in financial market volatility.
This is becoming worse as President Donald Trump gave a signal that he will not quietly accept a loss. The market begins anticipating for the worst. US political tumult from presidential candidates fighting at court will only sideline the slumping economy and the response required for its problems.
And the market’s anxieties do not stop there. On Friday, October 2, news came out that President Donald Trump has tested positive for Covid-19. If in the coming days Trump is confirmed to be truly ill and unable to run the government, the market can grow even more volatile. On the contrary, if Trump simply tested positive for the virus without symptoms, the market might be able to calm down. But one question remains: how will the elections continue?
It’s just one month before election day. Will there be delays for the schedule? Or will there be a candidate change from the Republican Party if Trump is truly not fit enough to continue the contest? These are questions that may only be answered in the next one or two weeks. What is clear is that the US constitution has a schedule that has never been missed even once. For this period, by January 20, 2021 in the latest, the US must have a president elect to be sworn in.
Analysts immediately calculated that Trump’s illness means Joe Biden has a bigger chance of winning. The Democratic Party can also make use of the situation to take over the majority of the Senate, thus fully controlling the legislative arm of government since it has already held the majority of Congress since 2018.
Trump might be an unpopular president. Many of his aides quit or got fired midway because they cannot stand the President’s policy or style. But so far, financial markets have reaped many benefits from Trump’s policies. Now, investors must anticipate a change in US economic policy orientation if the president and the legislative arm are both under Democratic Party sway.
Analysts estimate that commitments by the government, legislative institutions and the central bank to support the financial market will not be as strong as in the Trump era. Meanwhile, financial markets now are highly dependent on the stimulus of very low interest rates and unlimited liquidity injections from the Federal Reserve. If this situation changes, there will certainly be painful adjustments in the financial markets.
The shift in policy can also hit Indonesia and other emerging markets. Indonesia is still highly dependent on portfolio investment funds. This situation has made price movements for various financial assets, bond yields, interest rate, and the rupiah exchange rate highly sensitive to the Fed’s rate. A slight rise in US interest rates, for example, will cause the rupiah to depreciate significantly.
In the midst of this uncertain situation, in September, the House of Representatives and the government agreed on a highly optimistic 2021 state’s budget. The government and the House even pegged an economic growth target of five percent next year, a huge increase from the government projection for the current year which is minus 1.7 percent. As for the rupiah exchange rate, it has been set at Rp14,600 per US dollar. Meanwhile on October 2, the rupiah has reached Rp14,992 in the spot market.
There is a risk that investors would question state budget’s credibility for such an overly confident assumptions. In this crisis, however, the government simply has no other option but to stay optimistic. And as for investors, it would be best to make more realistic calculations when things get so uncertain.