Strengthening Economic Resilience

REUTERS/THOMAS WHITE

An Indonesian Rupiah note.

The pressure on the rupiah exchange rate has been immense given the high economic temperature. Even though in the past weeks the pressure has begun to decline, it does not mean the storm has passed, as the potential for shocks that have triggered the weakening of the rupiah still remain.

Externally, the United States Federal Reserve (the Fed) will raise its benchmark interest rate at least twice more. It is feared the US’ policy normalization will trigger massive outflows of foreign funds from Indonesia. Not to mention the impact of the US and China trade wars, which could result in the decline of various commodity prices. Indonesian commodity exports will certainly face more challenges. As a result, it will be difficult to avoid the risks of a trade deficit.

The fluctuation of the rupiah exchange rate is, most likely, not temporary. It will be therefore overshadow the economy in 2019, meaning the journey on the bumpy road will continue for the foreseeable future.

Economic vigilance is needed to anticipate and mitigate various sources of turmoil. Like a marathon race, we must be able to maintain stamina so as not to weaken until finish. We should not only be able to demonstrate our strength at the beginning of the race, but also have a strategy to maintain economic resilience at least until 2019.

Moreover, from the beginning of the fight, psychological pressure and negative sentiment have hit investors. The effect of taper tantrums has resulted in the migration of large amounts of funds to the US. As a result, Argentina and Turkey have become the first victims, falling into economic crisis.

In early September, the Argentine peso was in free fall, losing 51.67 percent compared to the level recorded at the end of 2017, followed by the Turkish lira, which lost 43.85 percent. The rupiah depreciated by 8.01 percent but it was still better than the Indian rupee, which fell by 9.7 percent. The difference is the ratio of India\'s foreign exchange reserves to its foreign debts reached 390 percent, even though India\'s current account deficit was only 2.4 percent of gross domestic product (GDP) in the first quarter of 2018. Meanwhile, Argentina\'s current account deficit reached 4.7 percent of GDP and Turkey’s -5.9 percent of GDP, with the ratio of its foreign exchange reserves to foreign debt below 100 percent.

Although the government continues to claim that the rupiah’s depreciation rate remains at a safe level, from January to July this year, Indonesia\'s trade balance deficit reached US$3.09 billion. The trade deficit rose sharply due to a surge in imports, which rose by 24.48 percent to $107 billion during the period. Meanwhile, exports grew by only 11.35 percent to $104 billion.

With the unconvincing performances of the sectors related to foreign transactions, it is logical if Indonesia\'s financial sector is considered quite vulnerable. Investors and financial market players fear that Indonesia will be hit by the contagious effects of the economic crisis of Argentina and Turkey.

Learning

Therefore, building up a perception that Indonesia\'s current economic condition is different from that during the 1997/1998 crisis is not enough. The potential or risk of an economic crisis could be small. However, despite being able to avoid falling into the crisis trap, can Indonesia escape its dependence on the domination of foreign powers and big countries?  Indonesia should have learned from Thailand, which was able to rise up and strengthen its economic fundamentals after becoming the epicenter of the baht exchange rate crisis in 1997/1998.

Now Thailand\'s foreign exchange reserves reach $203 billion. The exchange rate is based on the baht exchange rate of 32 per US dollar. According to Bloomberg, the baht has the best exchange rate among the currencies of 22 developing countries.

Thailand has successfully boosted its exports and the number of foreign tourists to raise foreign exchange earnings. Thailand has become the top destination of foreign direct investment (FDI) and has become the production base for various global products.

The Finance Minister recently issued Regulation Number 110 / PMK.010 / 2018 related to the restrictions on import of 1,147 consumer goods. Controlling the import of consumer goods is indeed a necessity, especially those with relatively small impacts on economic productivity.

According to Statistics Indonesia (BPS), the contribution of the total imports of consumer goods is only around 9.23 percent. The effectiveness of these policies must be carefully calculated so that it will not be counterproductive. If miscalculated, Indonesia could be accused of being a protectionist, which could in turn see retaliation from Indonesia\'s trade partners. Supposedly, import control through taxation instruments should be carried out selectively, focusing on products whose imports have increased dramatically and with large value.

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

The sharp increase in imports is due to meet the needs of infrastructure projects such as power plant projects. Imports of engine and aircraft parts, electrical equipment as well as steel reached a total of $32.9 billion. If the imports of these goods could be controlled through the postponement of projects that are not urgent, the increase in the use of locally made components (TKDN) and import substitution, it would significantly reduce imports. If these measures are able to save 30 percent, then imports can be reduced by around $9.8 billion. It will be far higher than the potential cut resulting from the restriction on 1,147 imported commodities, which will total only $5 billion.

Even so, efforts to control the import of consumer goods remain a priority and should be seen as a moment to boost import substitutions in order to increase the utilization of Indonesia’s production capacity and to strengthen the competitiveness of domestic industries.

The key to further strengthen economic resilience is to maintain the source of domestic economic growth, especially household consumption and national productivity.

Enny Sri Hartati, Executive Director of the Institute for Development on Economics and Finance