Monday, 18 July 2016


Surprisingly the Fed again suspended increase of FFR; and spontaneously the global financial market reacted to it with suspense.

Many circles expected the Fed would be decisive in regard to FFR increase, so all central banks of the world could adjust their strategies with the existing condition.

The monetary crisis than befell on America in 2008 triggered by cumbling subprime mortgage left serve damages which called for through restoration. To keep economy rolling, the policy of determining benchmark rate was high on priority list.

As America’s economy improved the rate lowering regime would be in reserved motion, after being proceeded by Quantitative Easing Package in October 2014 last. It had been a long time since the Fed increased FFR; the last time they did it was in 2006.

Each time before FOMC Meeting the target if FFR increase was already set including the timing. The public must have clue which was the Fed was headed for.

The Fed’s policy placed national interest high on priority list and since the USA was the biggest economic power of the world, the impact of the Fed’s decision was felt by the world including Indonesia.

Rupiah was even more miserable as People’s Bank of China devaluated their Yuan to jack up their export which dropped. The economic condition in America and China affected global moneymarket as they were the world’s leading economies.

Uncertainty was still hunting the world’s economy as the Fed suspended increase of FFR and China devaluated Yuan, which means Rupiah position was still unstable. FOMC planned to meet in October with probability FFR being increased; but it was still possible that FFR increase be postponed till December, or even in early 2016.

Talking into consideration devaluation of Yuan, the Fed postponed increase if FFR which showed how concerned they were with China’s macro economic policy. Devaluation of Yuan means that US commodities which were more competitive.

Under the circumstances it was advisable for the Indonesian Government to scheme up a strategy with the objective of creating direct impact on economy to regain market confidence and uplift Rupiah value which had come to Rp.14,600 per USD.

As told, the Government had launched Economy Package Policy on September 9, 2015 to revitalize economic slowdown. Apparently the instrument in that Policy was deregulation focused on industry and trading for the medium and long term.

It must be understood that the real sector today was in need of Government policy which could produce instant result.

The year 2015 was a hard for the world and Indonesia. Uncertainty was long and dragging which needed short term solution.

Short term policy was an urgent matter to rescue industry and prevent mass worker’s dismissals. To illustrate, the furniture industry was trouble by high bank interest, demanding labor unions, and unfriendly regulations.

It was noteworthy that the furniture industry was one of Indonesia’s important export commodity because 80% of the raw materials were from local resources.

At global level, furniture and woodcraft industry totaled USD 140 billion. The biggest market was the USA and Europe and China being the biggest exporter of furniture with export amounting to USD 50 billion in 2014. Vietnam had a share of USD 7 billion while Indonesia commanded over only around USD 2.8 billion.

In fact Indonesia with all the potentials had the potential to export more furniture. Unfortunately because Indonesia’s competitiveness (in terms of investment climate) was low, Vietnam excelled over Indonesia. The bad news was that 10 to 15 companies in Indonesia were planning relocate their business to Vietnam in 2016 next year in the form of foreign capital investment.

Some economist believed that believed the furniture industry as labor intensive industry was most potential for minimizing property and to promote people’s welfare. Form the macro perspective, the global situation today was definitely unfriendly to the furniture industry or any industry at all because of Indonesia’s poor competitiveness.

In this case BI’s policy not to change benchmark rate at the Board’s meeting was worthy of appreciation. No matter how attractive the incentive to propel economy through lowering of benchmark rate, the side effect of lowering BI rate of Rupiah must not be ignored.

At a time when Rupiah slumped to Rp.14,600 per USD and forex reserves dropped to as low as USD 103 billion, to increase BI rate was not attractive.

It must be borne in mind that the Economic Policy Package and all the deregulations contained therein was nothing more than paperwork which were still to be proven of their effectiveness by sound action afield.

One thing to be understood was that the September 1 package designed to respond to crisis challenge was long term by nature so it might take some time before any result was visible while crisis was lurking at the doorstep, under such circumstances a safety net would come in handy.

The crisis cushion was intended to maintain or step up people’s purchasing power. For that matter, it was necessary for the Government to maximize effort to prevent large scale dismissals. At the same time the Government must also provide job opportunities for jobless.

To keep producers working, the Government could learn form the economic crisis of 2008 when they reduced taxes for companies. Lessened tax made investors maintain their business in Indonesia, instead of moving to another country where tax was less.

Companies expenses were reduced. Thereby companies did not have to dismiss their workers so their purchasing power remained. Such was against the Government effort to jack up taxes, but that was the price the Government had to pay. At any rate the Government must propel economy because in the end it was income-from-tax which would increase.

Business people asked the Government to consider reduction of Income Tax and personal taxes as economic stimulus. In their opinion it was not wrong for the Government to sacrifice income-from-tax target as long as economy in all lines was re energized.

Naturally tax reduction would result in reduced state’s income-from-tax. However, reduction of company’s tax was temporary. If condition returned to normal, the Government could always bring back corporate tax to previous level.

The Government could still learn from 1998 crisis when at that time the Government ran labor intensive projects. Rural fund could serve as instrument to fuel labor-intensive program. Hence the villagers would have better purchasing power. Property in the villages would be minimized to keep the economic machine rolling. (SS)

Business News - October 2, 2015

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