Bad policies could cause a repeat of 1998

Satria Sambijantoro and Amahl S. Azwar, The Jakarta Post, Jakarta/ Cianjur, West Java | Headlines | Mon, September 02 2013, 10:03 AM

Indonesia has not come up with “good policies” quickly enough as its current account deficit widens and its currency continues to plummet.

And the failure by policy makers to deliver the right responses to investors could lead the country to a repeat of the traumatic 1998 financial crisis, during which the economy also saw an overshooting exchange rate, slumping foreign exchange (forex) reserves, high inflation and a sharp slowdown in growth.

Former Bank Indonesia (BI) governor Darmin Nasution once blamed the deficit, which has occurred for seven consecutive quarters since late 2011, on President Susilo Bambang Yudhoyono’s unwillingness to curb fuel subsidies that had enlarged oil imports and created an unnecessarily high dollar demand.

Following seven consecutive quarters of current account deficit, the government finally hiked fuel prices in June and introduced a fiscal policy package last month to help boost exports and reduce imports.

These measures are expected to help address the current account deficit and weakening currency.






The current account deficit reached a historic high of US$9.8 billion, equivalent to 4.4 percent of gross domestic product (GDP), in the second quarter this year, while the rupiah is now trading near its four-year low of 11,000 per dollar.

“The current account deficit is a structural problem, and it will take two to five years just to reverse it back into surplus,” warned Eric Alexander Sugandi, a Jakarta-based economist with Standard Chartered. “The policy package is just too late, it should have been introduced a long time ago.”

International ratings agency Fitch Ratings, which granted Indonesia investment grade status in December 2011, has warned of “negative rating actions” if there was a “broad and more sustained loss of confidence among investors” toward Indonesia due to its deteriorating macroeconomic indicators.

Asian Development Bank (ADB) economist Iwan Jaya Azis was quoted by Kompas daily as saying: “If we do not act carefully, the 1998 financial crisis could happen again. The problem is not as simple as it looks, such as pressure on the exchange rate or deficits.”

Vice President Boediono said he was “optimistic” Indonesia would get through the ongoing economic turmoil, adding he supported the central bank’s recent move to raise its benchmark interest rate.

“I’m confident Indonesia will get through this crisis,” he said on the sidelines of a media gathering at Cipanas Palace in Cianjur, West Java.

Boediono, a former BI governor, said he had faith in Finance Minister Chatib Basri and BI Governor Agus Martowardojo to address the turmoil, calling it “small storms or small turbulence”.

Indonesia was the apple of every foreign investor’s eye as it managed to stay strong when the global economy was still struggling to recover from the 2008 recession.

At that time, the country also recorded low inflation, a stable political climate and a young workforce.

Two of the so-called “Big Three” ratings agencies granted a prestigious investment grade status to Indonesia’s credit rating, which the archipelago had earlier lost following the 1998 financial crisis.

Improved investment grade credentials helped Indonesia to attract foreign investment, which jumped 26 percent to top its historic-high of $22 billion throughout last year.

Global consulting firm McKinsey & Company said Indonesia’s economic potential was so high that, if local policy makers succeeded in retaining such a high level of growth, the archipelago would overtake Germany and the UK as the world’s seventh-biggest economy by 2030.

But Indonesia must now swallow a bitter pill amid its turmoil.

After enjoying 6-plus percent economic growth since 2010, the country surprisingly expanded by a mere 5.8 percent in the second quarter of the year.

The central bank estimated the country’s GDP could only grow by 5.9 percent by the end of the year from last year.

The situation was aggravated by the huge capital outflow occurring in the region as foreign investors were spooked by the possibility that the Federal Reserve — the US central bank — might soon taper its monetary stimulus that would lead to tighter global liquidity.

The Jakarta Composite Index (JCI), which closed at 4,195.09 last week, has dropped by more than 20 percent since breaching the 5,200-mark on May 20, two days before Fed Governor Ben Bernanke hinted over the possible winding up of the US monetary stimulus.

Bond yields are on an upward trend, driving up the government’s borrowing costs that could exert further pressure on the state budget. Indonesia’s benchmark 10-year government bonds have seen their yields rising by a cumulative 353 basis points since January, according to Asian Bonds Online data.

BI — which has jacked up its key interest rate by a cumulative 125 basis points to 7 percent this year to calm the restive financial market and save the rupiah — is losing its forex reserves that had depleted since the beginning of 2013 by 18 percent to $92.7 billion by the end of July.

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