Sunday, 12 January 2014

HELLO 2014

End of 2013 was characterized by pressures on Rupiah value. At the spot market, Rupiah was transacted in the range of Rp 12,000 per USD which was the lowest exchange rate value since March 2009 last. Some economists believed that the to protect Rupiah could no be done just by way of running monetary strategies the overdose way, i.e. continually increasing BI rate.

The Government and the related ministries were advised to adopt a policy which propelled growth of the real sector. Regretfully, so far the only “medication” applied on rupiah by BI was just increasing BI rate time after time.

The theory was that increase of BI rate could minimized pressures on Rupiah; but that was not the was it happened. So another policy would come in handy beside the monetary policy adopted by BI. If Rupiah weakening were not tackled, things might get worse. For that matter a broader and more comprehensive strategy was needed, not just involving one institution.

The Government must troubleshoot problems which directly affect Rupiah exchange rate value. The strategy was how to keep export from downturning and how to control import. Rupiah weakening also reflected poor national competitiveness. Many indicators such as trade balance and balance of current transaction and balance of payment were posting sizable deficit. It was not an exaggeration to say that Indonesia was suffering from triple deficit.

One thing was sure there was no thinkable instant solution after a combination of monetary and fiscal approach were exercised to comfort the market and generate peace. The most important thing called for was commitment to correct structural problems. Or else Indonesia’s position in the global production chain would constantly be marginalized and various macro economy indicators would remain negative.

In the eyes of businesspeople, Indonesia was a vast and appetizing market where they could explore resource and reap profit in all lines of business. Unfortunately, Indonesia had no sound and comprehensive national strategy whereby to manage the domestic raw materials and auxiliary goods at home, all assigned to investors and marketplayers and focused on certain sectors especially which were extractive.

The result was that the faith of national economy was subject to, and determined by, world’s commodity prices. Ever since quarter IV-2012 the mining sector had growth negatively due to downturn of commodity prices. Foreign investment was high, but needed vast amount of imported components. More than 90% of import were raw materials and auxiliary materials. If investment increased, import would soar up and deficit in trade balance would widen.

That was the reason why BI sets credit growth for 2014 at only 15% - 17% so investment would decline and import be reduced. But this BI policy was dilemmatic; if credit growth dropped, investment would be corrected so economic growth would slow down. Such was the high price to pay for a structurally weak Indonesia’s economy.

The price must be paid by job seekers or by marginal people. Every correction of economic growth rate was always accompanied by less employment and the nation’s inability to reduce poverty. There was no choice but to solve structural problem. In this case all ministries must be involved, not just the Ministry of Finance.

Rupiah value was sinking deeper as fundamental economy was fragile. Many factors made Rupiah lose energy. The cause was high import of raw materials, i.e. 77% of total import and repatriation of dividend. Indonesia could not rely too much on available USD at home considering the still unstable global economy. High  demand for USD in the domestic market was not balanced with supply. For that matter BI had to struggle hard to control exchange rate value.

BI underscored that Rupiah weakening of Rupiah on account of demand for forex by customers of corporations and retail including repatriation of dividend. Compared to early 2013, Rupiah exchange rate value was depreciated by 5.71%. The condition was in parallel with depreciation of other currencies in the region.

Pursuant to that matter, aggressively BI made some maneuvers to ease Rupiah weakening, including increasing FasBi rate or deposit facility by 25 basic points to become 4.25%. fasbi was a facility given to place their fund in BI in rupiah. The policy was to maintain stability of monetary condition in line with weakening of Rupiah value recently. BI would secure liquidity of forex and rupiah in the market as pre-emptive measure to stabilize the monetary sector.

Only trouble was that the deficit suffered by Indonesia was chronical. For the past twenty six months Indonesia’s current transaction was showing deficit. Now, in quarter III-2003 the percentage came to 3.8% against GDP or USD 8.4 billion, down against quarter II at 4.4% against GDP or USD 9.9 billion.

Deficit was caused by deficit in oil trading which expended. In quarter II/2013 deficit in oil trading was posted at USD 5.29 billion, then increasing to USD 5.86 billion in quarter III. It was on account of increase in oil import from USD 9.53 billion to USD 10.69 billion. On the other hand this year economic growth was not as expected.

The Government argued that economic growth which was below expectation was to reduce deficit in current transaction. High growth would have its impact on upjump of demand for oil importing which increased pressures on current transaction.

The Government rated that BI’s step to increase benchmark rate to 7.5% was the right step. BI’s step would reduce deficit, because to reduce demand means economic growth would lessen. In this case the Government was optimistic that Indonesia’s economy would be able to grow in spite of projections by some economic circles and international institutions that Indonesia’s economy would post slowdown in the political year of 2014.

In June 2013, IMF, the World Bank and ADB projected economic growth to be in the range of 6.2% - 6.6%. However, last October it was revised to below 5.5% - 5.8%. The World Bank predicted Indonesia’s GDP growth in 2014 would only be in the range of 5.3% of down against 5.6% in 2013.

The World Bank reasoned that slowdown of economic growth was due to downturn of investment in infra-structure and machinery which was only 4.5% but the figure was rated as solid and Indonesia was still an appealing place for investment. Deficit in Current Transaction 2014 against the previous USD 31 billion or 2.6% of GDP was thanks to reduced import and increasing demand for export.

In response to the projection of the institution, the Government through the Coordinating Minister of Economy Hatta Rajasa rejected World Bank’s statement that Indonesia’s economic growth in 2014 would only be 5.3%. The Government remained optimistic that Indonesia’s economic growth would be in the range of 5.6% - 5.8% assuming that the World’s economy would be better.

The Government was optimistic that Indonesia’s economy would manage to grow in 2014 as the condition in 2013 was very much like 2008, just one year before the 2009 election when there was also economic turbulence – but evidently Indonesia managed to pass the crucial point. The condition of today was excatlly the same as 2008: just one year before the 2009 election only the current transaction was different. So the Government was optimistic to be able to overcome.

Many analysts saw Indonesia’s potential as a prospective country for investments in 2014. Apparently there was high flow of investment as seen in 2013, i.e. foreign investment in retail business, hotels, restaurants etc.

At the moment the visible phenomenon was gradual betterment of economy in the USA and part of Europe where crisis were subsiding. This means better prospect for developing countries like Indonesia, where foreign capital was flowing back.

If the 2014 election ran well and bore a new Government it would bring peace to the businessworld to start sound business plans. It seemed that in 2014 the crisis abroad would gradually subside; hence hopefully Indonesia's export would be jacked up in line with increasing commodity prices which would improve Indonesia's balance of payment. In view of all the indicators this year and all the challenges ahead, it was most likely that growth of 2014 would be higher than 2013. 

Business News - December 31, 2013

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