by: B. Nicodemus,
Finally, the new Cabinet is with us with some new faces joining President Susilo Bambang Yudhoyono’s top aides. With the eurozone debt crisis still threatening the global economy, all eyes are now on ministries in economic affairs. How they respond, this threat is their latest challenge.In doing so, a careful diagnosis is required before prescribing any medicine. Speaking about the crisis, the real world economy is clearly no textbook case, evidence of which is seen in Indonesia’s recent economic situation.
Pick up any recent economic indicators for Indonesia and you will hardly see a negative picture. The economy grew 6.5 percent in the first half of 2011; inflation has been modest at 4.79 percent and the debt-to-GDP ratio has been declining over recent years.
According to ratings agencies, Indonesia is also only a notch away from investment grade. However, our rupiah has fallen against the US dollar.
In contrast, the US economy does not share a similar optimism. Unemployment rates there are high, currently standing at 9.1 percent. The country is also still struggling with its debt challenge. However, the exchange value of the greenback is rising.
By theory, a currency will increase or become more valuable when demand for it is greater than supply. Conversely, its value will fall when demand is less than supply. Since the rupiah is falling against the dollar, this means people prefer holding dollars than rupiah.
The preference for holding dollars is the issue, and it is a big issue. Foreign investors are withdrawing money from Indonesia to be converted into greenbacks. Official data shows non-resident investment in Government Securities dropped from Rp 248 trillion (US$28.27200 billion) in July 2011 to Rp 218 trillion in September 2011.
Holdings of Bank Indonesia certificates (SBIs) by non-resident investors also declined by US$680 million in one month (August). And our stock exchange shared a similar story in August. Foreign investors were involved in massive selling, which lead to a steep decrease in the stock index. Since foreign investors are the main players in the stock market, whatever they do tends to move the index.
To sum up, Indonesia is clearly facing massive portfolio outflows. The question now is why foreign investors are leaving a country with good economic performance? Why do they prefer to hold a currency of a country with poor economic indicators?
There is no easy answer to this and different analysts may have different standpoints. However, many would agree that for non-resident investors, Indonesia is not regarded as a safe place to keep money, despite the economy’s good achievements. As the eurozone debt crisis solution remains unclear, they have been keen to withdraw their money from Indonesia and convert it into more secure assets.
The reasonable option for many is the US dollar, and this is most probably for the following reasons: First, the US dollar is the standard unit of currency in the international commodities market.
Second, it is used in most international transactions. With its global role, the US dollar is the best option compared to other currencies despite the poor economic performance of the United States.
As for Indonesia, a number of issues are clear. First, it has been confirmed that capital outflows are a real problem for Indonesia. The country is prone to sudden reversals of foreign investment.
Second, the financial sector in Indonesia is prone to external shocks because foreign investors are the main players. The stage is ours but actors are not.
This is also a pity since domestic investors tend to follow foreign investors’ footsteps.
Third, despite all efforts to manage macroeconomic stability, Indonesia will easily fall into economic hardship if the issue of foreign players’ dominance of the financial sector is not addressed properly. Last, pressure on the Indonesian economy usually starts in the financial and capital markets.
The new economic team in Cabinet should be dealing with these issues.
One policy to be considered is to discontinue foreign investors’ domination in the local market by increasing domestic investors’ portfolios. Foreign investors are playing “easy come, easy go” with their money. Also, foreign investors’ time horizon for investment is often short-term and they are thus easily influenced by external sentiment.
To see more domestic investors, public education on investment should be intensified. This should help make people more aware of the benefits of investment, both in capital and financial markets. People should be familiar with stocks, bonds and other financial investment instruments.
They need to learn also that investment activities have longer-term benefits. With this knowledge, they will not easily be panicked by the market’s ups and downs, or follow foreign investors blindly.
Indonesian people would do well to adopt sensible investment habits — the sooner, the better for the country. Furthermore, now is the best time to strengthen domestic investors’ position since Indonesia’s middle class is growing rapidly.
Based on a report from the World Bank, Indonesia’s middle class population has increased from 81 million in 2003 to 131 million in 2010.
This group, who spend $2-$20 (in 2005 purchasing power parity terms) per day, is capable of accumulating large amounts in savings and the financial sector should be able to accommodate that big chunk of money.
We have seen how local economic players are crucial in the Indonesian economy. After the crisis, Indonesia recorded positive economic growth due to strong domestic consumption.
In 2008, amid the global crisis, Indonesia still managed to grow when other countries were experiencing negative growth. Again, this was thanks to domestic consumption.
The idea to strengthen domestic investors’ role should not be seen as promoting negative sentiment to foreign investors. Indonesia should always be open to global money, but should also introduce policies to mitigate its negative impacts.
Otherwise, foreign capital flight will be a recurring issue. Experience is the best teacher, and what happened with the rupiah recently should serve to teach us something.
The writer is a lecturer at Pelita Harapan University (UPH), Tangerang, Banten.
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