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.

Diffusing the time bomb: Cut the Baby in Halves

http://www.thejakartapost.com/news/2013/05/13/imo-view-cut-baby-halves.html


After a dual pricing system for subsidized Premium gasoline was met with skepticism and harsh critics, the Government stepped back from the brink last week. Once again, the President sent confusing signal as he was not yet sure with the option to raise the prices or cut fuel subsidy. As a result, the government has for the many time prolonged and created an ambience of uncertainty for business and the economy. The longer it delays to deliver the solution, the worse the situation would get. It creates a deadly time bomb!


The dual price policy came as a compromise in hope to avoid mass protests lead to violence and ease the ballooning budget deficit. The Indonesia’s gingerly President, mindful of his legacy after reaching his constitutional two-term limit, is always reluctant to raise the fuel price. The policy is considered terribly unpopular and costly politically and economically.

Politics always cast negative light. While fuel subsidy is not a matter of politics; nor is a matter of being isolationist or protectionist, it is always traded as political issue. Various plans to either cutting or removing the burdening fuel subsidy have been debated, fought over, amended and then dropped amid political opposition and procrastination.

Fuel subsidy is simply a matter of the bottom line, the best possible survival for the nation. The government has the means to diffuse the bomb! To save the nation from bankruptcy! Yet, it is too busy to escape from the intricate knots of the warring machines of the political parties. The time bomb keeps on ticking. The decision to save the nation from the imminent threat remains on the shoulder of our leader.

A great leader always comes with wisdom in time of peace or crisis. He is almost always a great simplifier, who can cut through argument, debate, and doubt to offer a solution everybody can understand. He is the anchor to keep the nation intact.

The suspense drama over the tangle of fuel price reminds me of one such great leader whose legacy has become an archetypal example of a judge displaying wisdom in making a ruling. With his most legendary expression "splitting the baby" or "cutting the baby in half", King Solomon has been successful to settle a great argument of two young mothers claiming as the true mother of an infant in their care.

Splitting the baby is essentially an unreasonable decision, a total madness that men consider a barbaric cruel act. Yet, the Wise King has seen it as the most logic solution to the case. He sternly gave an order to cut the baby in two; each woman shall receive half of the son.

He certainly doesn’t mean to literally cut the infant. He uses the ruling to reveal the true feelings of the two mothers. Cruel as it may seem, the decision has offered a solution to know the real mother of the baby.

Against this backdrop, I see the Indonesia’s current leader has been trying to apply such policy by implementing the dual price policy. Sadly, King Solomon’s wisdom has been translated incorrectly. The grand idea of the ruling is to save the baby as well as find the true mother and not the other way around.

Similarly, the Government intended to satisfy all parties; the people, the political parties; while at the same time safeguarding his legacy to save the government’s budget deficit. Each received a fair share according to the ruling of splitting the state coffer (the baby).

However, instead of saving the state coffer from unnecessary spending, the government literally cut and distributes the money in waste. It considered only the short term remedy for the complex case. It was almost as if rather than saving the baby, the policy taken by the government would accidentally kill the baby in the most horrific scheme.

Without doubt, any logical thinking would voice a protest of the bizarre ruling. No parties would benefit such policy in the long run. It would only delay the bomb to explode. While in reality, the time bomb keeps on ticking faster by the minutes.

Fuel subsidy scheme in Indonesia, at least in the last eight years, is no longer sustainable since 2004 Indonesia was no longer a net oil-exporting country. Thus, an increase in international crude price (ICP) would create oil trade deficit. It hurts the economy, causing a chronic illness that gets worse and worse every year. It needs a cure that could guarantee permanent healing.

Slashing the fuel subsidy is a politically-sensitive issue and will trigger massive demonstrations as seen in the past. The policy will hurt the economy in the short run. It will create an economy tsunami. Price levels will increase as prices of goods and services adjust. It will also put great pressure on the achievement of the country's inflation targets. The poor will be hardest hit. They will face more economic hardships. There’ll be politically and economically great costs if not buffered properly.

Nonetheless, to postpone the policy will only hinder the sustainability of Indonesia economic growth in the long run. It will rain down acids upon state finances and upon other macroeconomic fundamentals. Consequently, it will make the economy vulnerable to external shocks.

Therefore, to save the state coffer from bankruptcy, the government should execute the painful and agonizing measure. People might consider the policy madness. It tortures the poors. But, it is the most feasible solution for the long run to achieve sustainability. To raise fuel price is inevitable if the country wants to get benefits in the long run. It is the tool to diffuse the ticking bomb.

First, there is an urgent need to reduce the burgeoning fuel subsidy bill to prevent the 2013 budget deficit expanding beyond a legal limit of 3 percent of gross domestic product. Providing fuel at around half the real market price eats up a large chunk of the coffers. Billions of rupiah are spent annually to keep the fuel price low, intended to help lower-income citizens. People in turn have taken it for granted for a long time that to live without it would be terribly scary and choking.

While "the poor" get some crumbs from energy subsidies, the middle classes and rich use much more energy per capita and get the vast majority of fuel subsidies.Yet, by the end of the day, the lion’s share of such scheme accrues to the car-driving middle class rather than the motorbike and bicycle-riding poor.

Second, cutting fuel subsidies would reduce fuel smuggling. It is the natural law that price difference between subsidized and non-subsidized fuel opens opportunities for smuggling. If there was no price difference, such corruption could be mitigated and stopped.

Third, the money saved from these subsidies can be channeled to finance other important programs, particularly in health care, education, and other spending such as compensation programs for the poor (Bantuan Langsung Tunai) to improve their lives. The fuel subsidy should also be allocated to infrastructure development to lure more investors and other government programs to sustain economic sustainability.

Fourth, the policy will help to support innovative alternatives for renewable energy and curb the nation’s reliance on carbon-intensive fuels. As shown by supply and demand law, the rare commodity would tend to having increasing price over time. Fossil fuel is non-renewable resource that would someday exhaust.

For those reasons, the government should be more careful and wise in managing its policy. It is not just a playful impression to entertain the public. It is a real serious business to deal with as it has wide-ranging impact and great economic magnitude.

Like the Great King Solomon, a leader should use his wisdom to lead in time of peace or crisis.

The Fall of the Giants

Everyone is just kind of holding their breath to view the fall of the giants in Europe. Starting from the crumbling of Greek Pantheon, European countries are dragged along into the crisis as if the Greek Gods had left and shattered The Olympus, lol. Italy, once the birth place of the Great Roman Empire, has suffered the lingering crisis as well. Such dire situation has forced Italia Prime Minister, Silvio Berlusconi to resign after austerity budget had been passed. It is as if we witness history repeats itself, the clock of times being rewind back at the era when Greece and Roman Empire reached glorious momentum, then crumbled . Both leaders and citizens alike in European nations must brace themselves for an extreme long economic winter.


The lingering European debt crisis is worsening European Nations (EU) grapple with a massive sovereign debt crisis which bring worst economic winter. Last week, Standard & Poor’s (S & P) had mass downgraded nine euro zone countries like shaky borrowers such as Italy and Spain credit ratings which instantly sparked renewed fears over global market. S & P further stripped off France of its once-sterling AAA debt rating into AA. The lost over France had forced the credit ratings agency to cut European Financial Stability Facility (EFSF) to AA+ from AAA on Monday, plunging the European market into a fresh crisis. The agency argued that its actions on euro zone ratings were “primarily driven by insufficient policy measures by EU leaders to fully address systemic stresses”. Meanwhile, the United States is still struggling to recover from its financial crisis since 2008. The rate of unemployment remains stubbornly high and cut spending is on the rise to battle the enormous deficit. The global market now fears that the gloom over Europe would soon turn into doom. Combined with the sluggish economic development in US, this recently situation has roiled the global market by fears of new setbacks, defaults and the possibility of a double-dip recession. It may seem that the giants start to fall one after another.
Anxiety is building over the fate of Euro currency backed by the European Union (EU). It is the symbol of unity of the EU countries. Now, the solidity of EU is put on a test. In order to work properly, the struggling EU countries have to overcome their differences on proposals and formulas to cure the crisis. They have to work hard to correct differences in the underlying economies (i.e labour migration, nominal wage adjustments, price adjustments). In addition, they should establish mechanisms to ensure that imbalances are promptly corrected. It takes extra efforts to draw such consensus while each is trying to save its own skin. It is a financial as well as political issue. The road to recovery will be bumpy and rough. The global financial players are in wait and see position.


While US and Europe are still struggling to overcome the financial crisis, political turmoil is brewing in the Middle East Countries that once overpower Europe during the glory of the Ummayad and Abassid caliphate. The unrest is triggered by the rampant injustices, poverty and deteriorating economic life, and the repression for freedom of speech by dictatorship over the countries for generations. Tunisia is the country which brought the dictatorship, President Ben Ali, down and this victory has been causing a domino effect far reaching across the Middle East in which the legacy of U.S.-dominated governments across the region resided. The U.S. empire’s reach in the resource-rich and strategically vital Middle East has been shaken to its core as one by one the Giants fall. Will these countries be able to regain its sovereignty and seize an increasing role in the world? Well… the road into such stability and glory is still far ahead with all its long winding bumpy steps.


Meanwhile, Indonesia has scored a perfect point after Fitch had upgraded its sovereign credit rating to put Indonesia back on line among countries having the investment grade level last December, and followed by Moody this January after almost fourteen years of degradation since 1997/1998 economic crisis. Amidst global economic and financial uncertainty, this achievement is something we all cherish. It is recognition of the success of Indonesia to maintain its macroeconomic stability. The inflation rate is successfully curbed and the economic growth remains high. With these positive economic outlook, Indonesia might become a glistening jewel in Asia for investors who seek stable economic environment.


Yet, challenges ahead remain hefty especially how the government keeps maintaining close coordination with Bank Indonesia and other elements to safeguard the macroeconomic stability and how Bank Indonesia maintains to keep executing its right decision within the right time. Further, the government has to tackle the lack of infrastructure and rampant corruption. The government cannot afford to relax and remain alert at all times. It has taken much effort and many years to climb into this investment grade level but it will take only a few mistakes or bad decisions to undo the progress.