Bank Indonesia in the Eye of the Storm

Going to the traditional market this morning, I repeatedly sighed heavily to witness the price of food continue to skyrocket to heights unseen. My favorite tofu and tempeh, although remained in their former price, now became smaller and smaller in size. In our dismal economy, it's very difficult to make ends meet as I juggle living expenses and basic sustenance in the form of food.

For majority of housewives like myself, we just want to have affordable staple food and basic sustenance right on our table. We don’t really care about the current account deficit, interest rate or any inflation rate. We don’t care about how the Fed plans to scale back its quantitative easing programme that will set the rhythm for other global central banks as they juggle the objectives of supporting growth, controlling inflation and maintaining financial stability.

These technical terms make no sense to our mind, as we don’t really know how they work. Our simple mind just screams for the simplest need to have affordable basic needs.

Isn’t too good to be true in the long run?

Once again, the central bank and the government as a whole are in the eye of the storm. They have mounting pressures to stabilize prices, exchange rate, and financial stability.

It is said that the government import system, rising international prices combined with the weakening rupiah have triggered soaring price in major staple food commodities that rely heavily on import. Higher food costs are contributing to higher inflation, surging to almost 9%, which is one reason Bank Indonesia to raise its benchmark rate by 25 basis points to 7.5% last Thursday.

The move aims to dampen inflation, bolster the currency and ensure the country’s current account deficit move toward sustainable level. This is also in anticipation of Indonesia's policymakers over the storm blowing out of Washington over the timing of eventual policy tightening in the Fed policy meeting next week that might trigger further bouts of volatility.

Further, the central bank also trimmed down its forecast for growth this and next year to 5.5%-5.9% and 5.8%-6.2% as the current account deficit keeps sharply widening. It reached an estimated of $9.8 billion in the April-June period, equal to 4.4% of GDP.

This economic contraction suffered by not only Indonesia but also countries in emerging markets such as India, China, Philippine, Turkey and Brazil among others identified recently as an ongoing "Great Deceleration" across the emerging world.  After years of solid growth and becoming the darlings of global investors and driver of global growth for most of the last decade, these countries are now experiencing slowing growth and policy missteps due to the combined effect of decelerating long-term growth in China and a potential end to ultra-easy monetary policies in the US. 

This is to say that the global economy especially the emerging markets should brace for a possible of another crisis in particular countries like Indonesia and India that are dependent on capital inflows to fund large current account deficits, formerly derived from the ultra easy money policy by the Fed.

Oh yeah, the Fed’s policy has flooded emerging countries with influx of short-term “hot” money since 2009, in search for greater yield. Its move to embrace unconventional monetary easing has made emerging economies hostages to US monetary-policy cycles just like the Abenomics that has triggered currency wars. The looming capital reverse risks have cast shadows over the economy.

Now, these countries are feeling the full wrath of the Fed’s moment of reckoning. Some emerging economies might be well prepared to weather the storm by learning from experiences.  But some countries including Indonesia are at risk, having large current-account deficits, large foreign capital inflows, and depleting foreign-exchange reserves; thereby they face mounting risks of financial-market instability.

Morgan Stanley researchers have dubbed Turkey, South Africa, Brazil, India, and Indonesia as the “Fragile Five.”

With its recalibrated policy mix, Bank Indonesia has put greatest efforts to tackle the starkness of the faltering economic situation. Raising its benchmark rate is indeed an unhappy choice; not an ideal policy but it is so far deemed as the best possible option. It definitely will slow down growth and hurt the economy in the short run. Yet, in the long run, the policy is expected to bring sustainable current account deficit, curb inflation, and maintain financial stability.

The Central bank has done everything in its power to finesse these problems. Only time will tell whether the policies taken are the best remedy for our ailing economy or not. Afterall the art of monetary is hard to predict. 

And with most housewives across the archipelago, I wait and see, holding my breath of what might happen next in the next few months.  We just hope we can keep fill in our table with basic needs for life sustenance.