Ok well, now we are in January 2016. I will start this article with some case that what happened in Indonesia in 2015? Indonesia was slowing down, there’s no debate anymore about this. The question was no longer if there’s a decline - instead the debate has shifted to the next stage, such as “how bad is it?” or “how long will it last?”, and critically “how do we get out of it?”, these questions was always in my mind in 2015. Some of what’s happening was beyond Indonesia’s control, so not much could be done- but in areas such as infrastructure and other stimulus measures, the Government had plenty of levers at its disposal
An uncertain global economic environment has put emerging economies like Indonesia in a fragile position. On the monetary side, Bank Indonesia (BI) had maintained tight policies by keeping its rate at roughly same level of 7,5% for most of last year (2015). There were limited options for BI to loosen its monetary policy, given sticky inflation of above 6 percent in recent months, persistent external vulnerabilities and uncertainty with respect to the The Fed’s movements in the coming months. When Bank Indonesia maintained tight policies by keeping rate at level 7,5%, there are some people who hate this step. For your information that something worse could happen if Bank Indonesia decreases BI rate to 7,25%. BI has to stick to stability over growth! Why? Because keeping rupiah is the task and purpose in accordance with Bank Indonesia law no 4/2004 as i said before in my article “Pengaruh Ekonomi AS dan China Terhadap Fluktuasi Nilai Rupiah”. Bank Indonesia has maintained a tight monetary stance by keeping its benchmark interest rate at 7,5 percent since February 2015, even though calls have been mounting to lower the rate to revive the economy.
Ok by the way, as usual, people nowadays will make a to-do list or some of ‘em make resolution or some shit stuff in a new year. Now, i write this article on January 10th to January 14th, 2016 and I don’t do “new year resolution” whatsoever. So don’t ask. But, i’m curious of a “new year resolution” of Government in 2016. Where are we heading, fellas? And, I’m curious about the economic global in this year, will the economy recover in 2016?
1. THE FEDERAL RESERVE
The Federal Reserve’s end-of-year decision to raise interest rate was presented as the “normalization” of monetary policy and the end of the era of the 2007 – 2008 financial crisis. Ending seven years of loose monetary policy will not only shape US financial markets, but will have profound effects on economies and even politic across the world. Emerging market (including Indonesia of course), increasingly dependent on the flood of investment fleeing the US, will face challenges as the higher interest rates may make them less attractive for foreign investors.
Since 2007, The Fed deliberately pushed down interest rates in an attempt to boost consumption and investment. The Fed was broadly successful stimulating consumption and investment. As higher interest rates spread through the US economy, they will affect other countries, too. One main transmission channel is a growing differential between US and other developed economies. Let’s say Japan, UK and US. There are 3 countries who have extremely low interest rate and quantitative easing programs. The UK is anticipated to follow the US lead, but Japan and Europe could ressist tightening monetary policy in 2016. If so, higher US interest rate will lead to increased demand for American assets. That will push the value of the dollar against these currencies. Indeed the dollar already rose in 2015 as investors anticipated the interest rate differential.
So what happen to Indonesia? I mean we will wait what Bank Indonesia will do as the fed’s hike. Bi will increase its BI’s rate to 7,75%, or still 7,5%. Indonesia i mean, has more to fear from higher US interest rate. If BI raises to 7,75%, how about our economy? What i know is, till today, Bank and Multifinance companies still have a heavy pressure. They both still have to be very careful in throwing credit.Why? It’s easy to answer. Because the threat of non performing loans have not been gone. If BI raises BI’s rate to 7,75%, so Bank and Multifiannce companies will raise its rates too. And it’s DEFINITELY a bad news for some companies, cause it’s a significant effects on markets. But if it’s still 7,5%, Bank Indonesia will play a meaningful role to take responsibility keeping sthe stability of rupiah. Wait, it’s not just BI’s rate. How about capital outflow? When BI doesn’t raise BI’s rate, capital outflow will take time.
Well, how about our currency? What’s the influence of fed’s rate to our currency? Ok, i just use a logic sense of economy to explain this. In 2015 Indonesia were running current account deficits. Higher rates meant that the cost of financing these deficits by foreign borrowing was about to increase. We may say in the next 6 to 12 months, rupiah would lost roughly 10 – 20% of their value against dollar. And this is not a good news from our side. Fed’s rate significantly hit our rupiah.
By the way, i still believe that there’s some light at the end (in considering the risks). I hope Bank Indonesia and Finance Minister will do a tremendous job to handle this. But i still remember what John Conally said (according to what i read in BBC, last year probably), the dollar is “our currency but your problem”.
2. YUAN VS DOLLAR