A Flood of Dollars from Biden
FINALLY, he left without riots and bloodshed. Donald Trump had vacated the White House peacefully in the morning of the inauguration ceremony that involved 25,000 National Guards to secure Washington DC. The financial market is relieved as it prepares to welcome additional stimulus from the United States government, which has a spectacular value of US$1.9 trillion.
That is President Joseph Biden’s first act to fix the US economy that has been left in tatters from Covid-19. He has so many problems to mend: a weak economy, financial instability, and raising inequality.
The stimulus should raise the purchasing power of the US public, thus boosting demand for various goods and services. This has the potential to restore various industrial and business activities. In turn, the wheels of the economy can resume its turning even in the middle of a merciless pandemic. Stimulus giveaways in the form of direct cash will also help the poor that are most afflicted by the pandemic.
The market is keenly watching how this stimulus plan will unfold. If the US Congress and Senate are in agreement in the upcoming vote on February, euphoria can once again take over the market. The flood of US dollars in the economy will overflow everywhere and have widespread effects on the rest of the world.
As always, the financial markets moved first in anticipation. Positive sentiments that the stimulus will proceed smoothly has already moved markets to high gear. The S&P 500 Index, an important benchmark in New York stock price movements, rose to a new record at 3,835.50 on Friday, January 22, before the US market opened.
The markets of emerging economies are also enjoying the injection of dollar liquidity. According to Financial Times data, investment capital flowed rapidly into 30 of the world’s main emerging economies in the first three weeks of 2021. The total value of those investments reached US$17 billion. Investors are on the hunt for the much higher yields offered by the emerging economies. The low interest rates in developed economies are clearly not as attractive. Stock prices in emerging economies as a whole rose by 9 percent when counted in US dollars. For comparison, stock prices in developed economies rose by a mere 2.7 percent.
Naturally, Indonesia also gets the benefit from that flood of dollars. The Indonesian government sold bonds denominated in foreign currencies in the stock exchanges of Singapore and Frankfurt, totaling US$3 billion and €1 billion on January 12. The yields on those bonds were the lowest in history. One series, a US-denominated 10-year bond, only had a yield of 1.9 percent. Even so, to investors it is still more attractive than a US government bond with the same maturity but a yield of only 1.1 percent.
This is not limited to foreign markets; the flow of dollars directly into domestic exchanges is no less massive. According to Bank Indonesia data, throughout the first three weeks of 2021, foreign investors bought various assets with a total value of Rp16 trillion or US$1.14 billion.
Such a massive intake of dollars from bond sales overseas and direct flow into domestic exchanges should have significantly boosted the rupiah. Unfortunately, that has not happened. The rupiah remained calm, staying around Rp14,000 per dollar, with virtually no difference compared to the start of the year.
It seems that investors are taking into account one risk factor that can weigh down on Indonesia: higher interest rates. Should the Fed decide on a rate hike, global financial markets will be shaken and Indonesia will not escape the shock. Experience shows that when The Fed policy reverses course, the effects on the rupiah can be very deep, like what happened in 2013-2015.
Ironically, that risk will only come after Biden manages to rejuvenate the US economy. With the coming of inflation, the Federal Reserve must raise interest rates, or at least stop the flood of dollars. No one knows when that will happen. For now, the market is drunk with merriment, welcoming the flood of dollars from Biden.