A New Risk amidst Economic Recovery
Yopie Hidayat (Contributor)
THE world economy is starting to get back on its feet after it was brought down by the pandemic. In the United States, vaccination roll out has stimulated the economy. Consumers spending has increased. The Chinese economy showed extraordinary growth in the first quarter of 2021, at 18.3 percent year-on-year. In Indonesia, economic growth statistics for Q1 of 2021 will only be released next month. However, a positive outlook can be gleaned from the trade balance.
The high velocity of China’s economic growth has been a boon to Indonesia. Demand for various commodities soared, together with their prices. As a result, the total value of Indonesia’s exports in March has reached US$18.35 billion. There was a 30.47 percent jump compared to the same month last year.
But for Indonesia, import numbers are a better illustration of economic recovery. In general, Indonesia’s manufacturing industry still uses imported raw materials. Therefore, the increase in imports on March to US$16.79 billion, which is 25.73 percent higher than March of last year, reflects a significant increase in activity in the industry sector.
Even though the situation is improving, a new risk is arising in the market. Foreign portfolio investment is retreating. Since the start of February to April 14, foreign money which had been comfortably parked in various Indonesian government bonds started to leave. The total value amounted to around Rp32 trillion.
The attractiveness of Indonesian government bonds as an investment destination is declining. One of the reasons is the huge deficit in government budget to the point that Bank Indonesia (BI) must shoulder part of it. BI bought bonds directly from the government to cover the deficit. In other words, BI is printing money to finance government’s budget deficit.
This policy has raised questions among foreign investors, especially with regards to credibility. There is a risk that the rupiah will lose value if this policy continues. Meanwhile, seeing how the government’s budget will still suffer a deficit up to Rp1,006 trillion this year, it looks like the government must still rely on BI’s money printing press to patch up that gaping hole of deficit.
As if that were not enough, there has been a new development that could trigger foreign capital exodus from Indonesia. On Wednesday, April 14, the Federal Reserve Chair Jerome Powell sent out a signal to the markets. This is not about interest rates. The Fed’s targets for inflation and unemployment in the US are still very far from being realized. As such, the Fed’s interest rates will stay at around zero percent until 2023. This time, Powell sent out a signal about the continuation of the Fed’s liquidity injection into the financial market.
Besides holding interest rates at nearly zero percent, the Fed has helped financial markets by buying various assets, including US government bonds. In short, the Fed keeps printing US dollars and pumping it into the market. Due to the Fed’s actions, the prices of various assets in the market keep climbing. Money is abundant even though the real economy is in a slump as the pandemic rages on.
On that Wednesday, Powell signaled that the Fed will start tapering, or reducing their asset purchases, well before interest rates go up. This can be anytime in the short term. Since the pandemic broke out, the Fed has had injected US$80 billion of liquidity per month. If this injection of liquidity decreases, emerging markets will be hit the hardest. Once liquidity in the market starts tightening, investment funds will leave emerging markets and go back to America.
As usual, the market has started moving even though the tapering is still a signal. The rupiah exchange rate that has weakened since February fall even deeper to around Rp14,600 per US dollar. This is the beginning. The pressure will intensify once the Fed starts its tapering.