In Anticipation of Escalating Trade War

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The rupiah’s exchange rate against the US dollar and the Jakarta Composite Index fell on Tuesday due to growing concerns over the escalation of the trade war between the United States and China. Indonesia must be able to anticipate it.JAKARTA, KOMPAS — The escalation of the US-China trade has begun to affect the global economy. Stock markets in number of countries slumped on Tuesday as a result of retaliatory actions launched by the world\'s largest economies. Global currencies were also under pressure as investors and market players were worried that the US-China trade war would also affect global economic growth.

The Jakarta Composite Index (JCI) fell 1.05 percent Tuesday to 6,071.202 at the close of trading. Since the beginning of the year, the JCI has lost 1.99 percent. On Tuesday, foreign investors posted net sales of Rp 998.91 billion. Since the beginning of 2019 until Tuesday, foreign investors recorded net purchases of Rp 59.351 trillion.

The rupiah’s exchange rate based on the Jakarta Interbank Spot Dollar Rate reference rate further weakened to Rp 14,444 per US dollar, the lowest since Jan. 4. On Jan. 3 the rupiah fell to Rp 14,474 per US dollar.

At the global level, the Hang Seng Index of Hong Kong lost 1.5 percent while the Shanghai Composite Index fell 0.7 percent. The Tokyo Stock Exchange’s main index fell for seven consecutive days to close 0.6 percent lower.

Economist at Bank Permata, Josua Pardede, said the escalation of the US-China trade war would result in the decline of global trade, which would in turn lead to a further slowdown of economic growth in developing countries.

The US imposed additional import tariffs of between 10 and 25 percent on Chinese goods worth US$200 billion. China then announced it would raise import tariffs on US goods worth $60 billion from June 1.

According to Joshua, the government needs to increase direct investment and further improve the appeal of Indonesia as an investment destination. "Monetary and fiscal policies need to be improved in order for the country to be attractive to investors," he said.

On the monetary side, added Josua, Bank Indonesia needed to maintain the stability of the value of rupiah-denominated assets in the portfolio and financial markets so that they remain attractive.

The government’s efforts to maintain the stability of the rupiah must be also supported by the reduction of the current account deficit that has become a major factor causing the weakening of the rupiah.

Bhima Yudhistira, an economist at the Institute for Development of Economics and Finance (Indef), said that the US-China trade war would affect the financial sector and exports. "The increase in import duties can further worsen export performance, which fell 10 percent in March from the level recorded in the same period in 2018," he said.

According to him, another factor that weakened the rupiah and JCI was the country’s widening current account deficit. The deficit in the country’s current account has been recorded since the fourth quarter, 2011.

In the first quarter, the current account deficit reached $6.96 billion or 2.6 percent of gross domestic product (GDP). In the same period, the balance of payments recorded a surplus because of the surplus in financial transactions could cover the current account deficit. The financial transaction recorded a surplus of $10.05 billion, which consisted of $5.15 billion in foreign direct investment and $5.4 billion in portfolio investment.

Anticipation

The chairman of the Indonesian Chamber of Commerce and Industry (Kadin), Rosan Perkasa Roeslani, said the impact of the escalating trade war between the US and China must be well anticipated. "Investors move their funds from emerging markets to safe haven assets. This is why the pressure against rupiah becomes stronger," Rosan said.

On Tuesday, President Joko “Jokowi” Widodo and a number of ministers held a meeting to anticipate the economic situation in 2019. The International Monetary Fund (IMF) projects the world economy will grow 3.3 percent, while the World Bank projects the economic growth at 2.9 percent. Global economic conditions will have an impact on the domestic economy, especially exports.

Answering reporters\' questions after the meeting, Coordinating Economic Minister Darmin Nasution said the government was anticipating a further slowdown of world economic growth.

"The most important thing is that we have to attract more investment in such sectors as industry and tourism," Darmin said.

The efforts will be made more specific so that they can be well implemented. The government, for example, is encouraging tourism and manufacturing in a number of potential areas. Regarding geopolitical conditions, especially US-Iran tensions, Pertamina’s retail marketing director Mas\'ud Khamid said it had not affect crude oil stocks in the world market. ( DIM/ LAS/ CAS/APO/AFP/ REUTERS/ BEN)

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