Bank Indonesia is too late to save rupiah

For the local market players, the rupiah rate of 10,000 per US dollar is a sacred and crucial psychological threshold.

And that’s what Bank Indonesia (BI), the central bank, has failed to protect. The rupiah has ultimately hit the five-digit this week, a situation that some define as a perception of crisis. It happened mostly because BI apparently underestimated the magnitude of rupiah’s pressure in June, a period when the demand for dollars is usually at its heights due to surging companies’ earnings repatriation and foreign debt payments.

In April, the US-based JPMorgan Chase, a major player in foreign exchange (forex) business here, already reprimanded BI that foreign investors were beginning to become nervous about the availabilityof dollars in the upcoming months.

 In May, newly-appointed Finance Minister Chatib Basri warned that uncertainty over fuel subsidies could trigger massivecapital outflow, which could put pressure to the rupiah.

But BI stood still, keeping its monetary stance unchanged. The fruit of such negligence might be seen today, when both the aforementioned warnings become reality, with the rupiah’s sharp downswing already sending jitters to the market and prospective investors.

Under the leadership of Darmin Nasution, the central bank actually succeeded in coping with the escalating pressure of the rupiah in January, when BI was forced to heavily intervene in the market, splashing $4 billion of its forex reserves to prevent the rupiah from breaching the 10,000 barrier. The rupiah might already break the psychological level without the intervention, economists say.

And there are still weakening threats from offshore speculators using the rupiah as their wager. In January, an investigation in Singapore concluded that the rupiah rates there were actually manipulated by some banks, which colluded before submitting their respective rates, in order to reap short-term profits.

Facing escalating pressure for the rupiah, BI took action by hiking its overnight deposit facility rate (Fasbi) rate by 25 basis points to 4.25 percent on Tuesday evening. Hiking the rate would support the rupiah as BI could absorb excess liquidity in the market, as higher Fasbi rate means that lenders now have more incentives to make overnight deposits in the central bank.

But, isn’t this a step that is taken too late? Since beginning of the year, economists have warned that the spread between Fasbi and BI rate (now 5.75 percent, unchanged for 15 consecutive months) might be too wide, expecting a swift adjustment to support the under-pressure rupiah.

In fact, if BI had hiked its Fasbi rate one or two weeks earlier, the pressure for the rupiah might be well anchored, hence a strong possibility that the currency might have been still safe at 9,700-9,800 level at the moment.

The weakening rupiah is a threat for future inflationary pressure, as imported goods would soon become more expensive. Besides, it is worth noting that BI will most likely fail to meet its annual inflation target of 5.5 percent, with the central bank already forecasting that inflation this year could top as high as 7.8 percent due to the impending fuel price hike.

Weak rupiah is also a deterrent for bonds investors, who might find investing in Indonesia's bonds market as no longer attractive as their profits shrunk due to currency loss.

 Nevertheless, it’s not fair to blame BI too much from the current situation. The central bank should not be the one holding the biggest responsibility for the recent mess – BI, in fact, has been carrying way too heavy burden of maintaining stability at times when the government’s stupidity continues to systematically cripple the economy.

The pressure to the rupiah stems from the persistently high current account deficit, which continues to widen because of soaring oil imports. President Susilo Bambang Yudhoyono actually could solve the situation by hiking fuel prices (he has the authority to adjust fuel price without parliamentary approval), yet he remained undecided on the issue.

At times when our economy is facing challenging moments like this, the President even reshuffled its economic team, replacing Darmin with new Governor Agus Martowardojo in May.

With rupiah now heading into vicious depreciation cycle, that decision turned to be a howler: looking at Darmin’sreputation as an astute economic forecaster, there is strong possibility that he would be able to manage the situation better compared to Agus, who is still adjusting with his new life in BI.

With deliberation of fuel price hike is still ongoing, the hardball lies not only in BI, but also in the hands of the President and his fellow politicians in the House of Representatives.

And this time, they had better not be late. The uncertainty must be ended very soon to safeguard our economic sustainability, looking at how foreign investors now running away from the country in such rapid, alarming pace.

Surely we do not want massive capital outflow and exchange rate overshooting to continue, wrecking the economic fundamentals that we have carefully built since the 1997 financial crisis destroyed them all. 

This article was published in The Jakarta Post on Thursday, June 12 2013

Why so pessimistic about Indonesia?

CONFIDENT VIEWS. Stalling reforms and rising political risks have not deterred foreign investors to pour money into Indonesia, although recent economic slowdown and widening budget deficit will pose notable challenges for government officials. (From left to right) Finance Minister M. Chatib Basri, Industry Minister M.S. Hidayat, Bank Indonesia Governor Agus Martowardojo, Coordinating Minister for Economics Affairs Hatta Rajasa.

(photo by Nurhayati for The Jakarta Post)

  
Soon after international ratings agencyStandard & Poor’s (S&P) downgraded the outlook for Indonesia’s economy from “positive” to “stable”, economists and market analysts were quick in uproar, arguing that the economy might be heading into downhill.

Having been reluctant to grant Indonesia an investment grade status for its sovereign debt papers, the S&P instead gave the prestigious rating upgrade to the Philippines, dealing severe blow for Indonesia and its mission to pump in more investments that have become the country’s major growth driver in the last few years.

Facing economic slowdown and soaring budget deficit, Indonesia may soon lose its charm as the darling of overseas investors, so went warnings uttered by some economists.
However, the stories that went unnoticed from the S&P’s downgrade was the persisting optimism among foreign investors towards Indonesia, despite the downgrade in its economic outlook.

In theory, a downgrade in credit rating should directly affect demand for the government’s sovereign debt papers among investors, who first looked towards the official recommendation of ratings agencies before putting their money in a certain country.

Strangely, investors remained stubbornly queuing to invest in Indonesia’s debt papers. A government bonds auction on May 6 – held only two working days after S&P downgraded its outlook on Indonesia’s sovereign – was more than two times oversubscribed, with total incoming bids for the rupiah-denominated debt papers topping Rp 20.1 trillion (US$2 billion), far higher than the indicative target of Rp 8 trillion.

The yields only rose slightly in the auction. Bid-to-cover ratio (an indication of bonds’ demand among investors) for debt papers that mature in 15 and 20 years was more than 1.5, an indication that investors still have strong faith towards Indonesia’s long-term economic fundamentals.

Meanwhile, in the stock market foreign investors seemingly took S&P’s outlook downgrade as a laughingstock. The Jakarta Composite Index (JCI), whose players are more than 50 percent foreigners, continued its bullish trend by hovering at around 5,089 – an all time high – only a week after S&P’s downgrade was made public.

Apparently, investors saw that there are more reasons to be optimistic, rather than be pessimistic, about Indonesia’s economy.

It is a blatant fact that Indonesia does not really deserve to be left out in the cold by S&P, which instead turned to the Philippines for its choice of a country that has investment grade credentials.

Indonesia is Southeast Asia’s largest economy, boasting 250 million citizens, higher than the Philippines’ 95 million. Both the two economies are consumption-driven, but Indonesia – with population and middle-class numbers that are around three times higher than the Philippines – certainly guarantee more lucrative business opportunities for foreign companies looking to invest in the emerging market economies.

Amidst the prevailing global uncertainties, Indonesia boasts the status as the world’s most stable economies, with its robust household consumption successfully cushioning the country from external shocks. The country grew by average of around 6 percent over the last decade, with its economic growth never falling below 4.5 percent since President Susilo Bambang Yudhoyono took helm in 2004.

Compare that with the Philippines, whose period of high economic growth (it recorded 6.5 percent growth last year, higher than Indonesia’s 6.2 percent) was beset with volatility. Its gross domestic product (GDP) growth slumped to 1.1 percent in 2009, a case that highlighted the Philippines economy’s vulnerability towards risks stemming from the external environment.

In addition, Indonesia also has more ample fiscal space to boost its economic expansion in the medium-run, as its debt-to-GDP ratio currently stood at 23 percent, compared to the Philippines’ 41 percent.

According to the ease of doing business ranking published by the World Bank, Indonesia was ranked 128 last year, climbing from 131 a year earlier. In the same timeframe, the Philippines dropped to 138 from 136.

Numbers of people living below poverty line in Indonesia is currently around 12 percent of total population; in Philippines it is 28 percent.

Realizing these facts, Philippines newswire Interaksyon.com even threw cynicism to S&P’s decision to favor its country to Indonesia for a rating upgrade. It argued that, although the Philippines possessed the prestigious investment grade status, Indonesia would eventually still be the country hogging foreign investments coming into the region, thanks to its healthy macroeconomic indicators.

“Jakarta no doubt would love to have our grade,” the newswire wrote in its editorial. “However, our neighbors to the south will just have to make do with all those darned investments.”

It is fair to say that Indonesia’s era as a darling of foreign investors is not yet over, as at present it remains as the world’s least unattractive country amidst the prevailing global economic uncertainties.

President Yudhoyono has always called for optimism, urging people to think from the positive point-of-view, which is why we all should respond towards S&P’s downgrade not with excessive glumness. 

Instead, the downgrade in our outlook should be utilized as a wake-up call to ensure that we would not become lulled with all the bright economic indicators that we have been enjoying for years.

And what can also be taken into account from S&P’s downgrade is that our government officials really have no room for complacency. The suggestion is actually a very relevant thing to say to President Yudhoyono, whose indecisiveness on several pressing economic issues has so far caused Indonesia’s economy to punch well below its weight.

Critics frequently pointed out that Indonesia would still grow by more than 6 percent, even if the government does nothing to assist the economy. My suggestion to you, Mr. President: heed S&P's warnings seriously and start undertaking necessary policies to propel our economy -- you only have a year left to show that the country is not being run in autopilot.



This article was published in The Jakarta Post on Tuesday, May 14 2013

Protect Our Finance Minister, Mr. President

photo: Dwianto Wibowo for Tempo Magazine

It could look a little bit déjà vu if this three-week drama of cabinet reshuffle concludes with the dismissal of Indonesia’s tough Finance Minister Agus Martowardojo from President Yudhoyono’s administration.

Previously, Yudhoyono had let go another stellar Finance Minister, Sri Mulyani Indrawati, due to pressure from his mischievous coalition partners that were spearheaded by the Golkar party last year.

There is a possibility that last year’s drama could repeat itself this year with the same protagonist, same villain, and same ending: The villain bullies the protagonist, the protagonist is afraid and bows to the villain’s demand, and the ending wraps up with the protagonist ends up as the losing side.

The protagonist is of course President Yudhoyono, who decided to let go Mulyani last year even though she was arguably the best minister he ever had in years.

Yudhoyono clearly did not learn from his past mistake as Agus Martowardjojo, the current Finance Minister, is currently on the hot seat again. Just like last year, Yudhoyono did not give Agus enough protection to shield the Finance Minister from politicians’ perpetual harassments, leaving Agus standing alone in his battle to defend the state’s interest.

On the other side of the ring, the villain in is still the same as well: Golkar chairman Aburizal Bakrie who, impressively, managed to dictate many important decisions in Yudhoyono’s presidency and made the president himself very much like a controlled puppet.

After succesfully expelled Mulyani last year, the ousting of Agus from the Finance Minister post this year would reflect both Aburizal’s massive clout in the administration and Yudhoyono’s lame leadership. By driving Agus out, the message delivered by Aburizal was clear: You can mess with Yudhoyono, but don’t ever try to mess with me or my party.

Like Mulyani, Agus maintained a tough stance towards the Golkar party politicians and their power-hungry peers at the House. Agus was especially known for his clash with Golkar politicians over the government’s plan to purchase Newmont shares –a plan that Agus strongly believed would benefit Indonesia.

Lawmakers were against this plan and slammed Agus’s proposal. They furiously insisted the shares must be acquired by West Nusa Tenggara’s local administration, which is supported by a joint venture of a business unit that is owned by Golkar’s Aburizal.

The Finance Minister vs. House lawmakers battle repeated again last week over debates on the fuel subsidy quota, in which Golkar lawmaker Melchias Markus Mekeng lambasted Agus and described him as ‘does not have the authority to dictate the House’.

The fact that many Golkar politicians dislike persons with integrity such as Agus Martowardojo, Sri Mulyani, or even Trade Minister Mari Elka Pangestu (a Golkar lawmaker once uttered a racist statement and baseless accusation against her) is very much incomprehensible. For neutral political observers, it could only show that the party’s ideology is more about power and money, not the advancement of Indonesia to become a better nation.

Besides, if Golkar’s politicians and President Yudhoyono really care about Indonesia, they should understand that the timing of Agus’s exit could not be worse than now.

On Thursday last week, President Yudhoyono stated that he “would focus the next cabinet reshuffle to harness global economic challenges”. In truth, his decision to eject Agus from the Finance Minister chair would prove otherwise.

It is no exaggeration to say that if the current situation remains unchanged, we could bump into one of the world’s biggest economic crises next year. The European and American politicians are particularly responsible for the mess: Eurozone leaders are yet to reach agreement on what to do with their problematical currency, while the Republicans and Democrats legislators in United States are busy scuffling for their respective interests for the 2012 elections rather than controlling the country’s soaring fiscal burden.

Consequently, investors were scared off by recent developments in the West and symptoms of worldwide-scale economic crisis started to surface In Indonesia in the last few months. The once-strong rupiah –which once touched the level of 8,650 against the US dollar on August– has been under heavy pressure lately, while the Indonesian Stock Exchange index has plunged from the psychological level of 4,000 to 3,200 in a very short period.

By the time the crisis turns from symptoms into veracity next year, there is no doubt that the leadership of Agus –a former top dog CEO who successfully transformed Bank Mandiri to become one of Indonesia’s largest banks during the global financial fiasco– would be sorely missed.

There are signs that President Yudhoyono would try to minimize the issue by not ousting Agus at the upcoming reshuffle, but merely moved him to other ministerial post, such as the Investment Coordinator Board to replace Gita Wirjawan.

But this strategy makes little sense for two reasons. The first is the fact that the Finance Minister post is very vital, and there is no doubt that our current Finance Minister, who is a highly respected figure among investors and the global economic community, is among the few persons –if not only– capable for the job

The second is moving Agus Martowardojo to other ministerial posts is the same analogy with a football manager who plays his tough centre-back as forward.

In other words, Mr. President: It's like you have the best defender in disposal, yet you still leave a huge loophole in your defensive line as you give the crucial centre-back position to a less capable player.

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