Right now the uncertainty caused by the
US Federal Reserve's rate hike has already passed, but Indonesia still has to
be careful about the next step of the US central bank. Back in 1994 when the
Fed increased its rates twice in just two months, Mexico, which was running a
high trade deficit and issuing numerous global bonds, was affected.
Mexico faced default; the peso's value slumped, with a
total devaluation of 35 percent by the end of 1994. There was capital flight of
US$4.5 billion just two days after the devaluation and around $45 billion in
mutual funds was liquidated. In 1995 and 1996 the inflation rate reached 35.1
and 34.3 percent, respectively. Previously, in 1994, it had been 7 percent. The
crisis also spread to Argentina and Brazil in an effect called the Tequila
Crisis.
Currently, Indonesia has similar indications to the
Mexico of 1994. First is the current account deficit. 2014 was the third year
in a row that Indonesia ran a current account deficit; the last surplus was in
2011. According to the latest data, by the third quarter of 2015 Indonesia
still had a $4 million deficit, or 1.86 percent of GDP. In fact, Indonesia is
the only one of the ASEAN “big five” (Singapore, Malaysia, Thailand, the
Philippines and Indonesia) running a current account deficit. Mexico, prior to
the crisis, also ran a current account deficit, at the threatening level of 4.8
percent.
Second is the global bonds position. Indonesia has
been issuing many bonds, causing the debt service coverage ratio (DSCR – the
percent of debt compared with the export of goods) in 2014 to reach 23 percent,
the highest among ASEAN countries; indeed, no other ASEAN countries have a DSCR
of more than 8 percent. Mexico was at 37.6 percent prior to the crisis in
1993.Indonesia is also under pressure from its failure to attain its tax income
target; tax income this year is expected to be only around 80 to 85 percent of
the target. The budget deficit will possibly reach 3 percent of gross domestic
product (GDP) by the end of the year, up from the safety level of 2.5 percent,
meaning the government may be forced to issue further bonds. The tax income
target for 2016, an increase of 15 percent from this year’s target, meanwhile
threatens Indonesia with the possibility of a higher deficit next year. Mexico's
problem of issuing too many global bonds was actually a dilemma because its did
not want to increase interest rates despite the Fed's rate increase.
Banco de Mexico regulated the exchange rate (at the
time it was pegged against the US dollar) by using global bond instruments and
the bank issued dollar-nominated bonds to buy pesos to maintain the value of
the peso against the dollar.
Investors saw the peso as overvalued and enacted
capital flight.
Will Indonesia be like Mexico?
Some economists say that currently, Indonesia is still
safe. Regarding the current account deficit, David Sumual, chief economist at
Bank Central Asia (BCA), explained that the deficit could be offset by a
foreign investment inflow."The construction of infrastructure helps to attract
investors, but we need to carefully prioritize the infrastructure. As long as
we build what investors need, such as electricity, ports, road access and
logistics, we are safe, but since the infrastructure is financed by debt, if we
get it wrong, in three to four years we will be trapped in debt
insolvency," he told thejakartapost.com on Tuesday.
David said that currently Indonesia's currency
position was good because it has already depreciated, unlike in 2009 to 2014
when the rupiah overly appreciated. The weakness of the rupiah should be used
as a chance, he added, to encourage local industries and decrease imports.
Prior to the crisis, the strong Mexican peso caused the demand for imports to
increase, resulting in a trade deficit.
Regarding global bonds, Raden Pardede from Creco
Consulting said that the DSCR was high, but the important thing was for
Indonesia to maintain the trust of foreign investors.According to Raden, the
banking system is strong. The capital adequacy ratio (CAR) is more than 20
percent and even higher among state-owned banks, at 29 percent."But we
need to be more disciplined in the fiscal sector. The tax target in 2016 must
be revised and the administration must be repaired or else we’ll be trapped in
a budget deficit again and need to issue more bonds," he said.
Jahanzeb Naseer, head of Indonesian research at Credit
Suisse, said he appreciated the government's actions. Rather than playing on
monetary aspects, the government is issuing economic packages that stimulate
the economy from the consumer's side."The stimulus is creating more
purchasing power and in the end will increase consumption. The government is
also carrying out structural reform such as cutting red tape and inconsistent
regulations and setting more predictable formulae for minimum wages. Anton
Hermansyah
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