INDEF Researcher
IO, – Shutdown of US government operations is predicted to take place from the fourth week of January to the second week of February 2018. It is a consequence of disagreements between the President and Congress in the preparation of the State budget. The department which will be affected by temporary closure are at least, the Commerce Department, NASA, the Employment Department, the Housing Department and the Department of Energy.
For Indonesia the impact of this temporary shutdown is very minimal to the rupiah exchange rate. The rupiah projection is still within a controlled range of Rp.13,350-13,400 when the shutdown occured. This is due during the shutdown period, the US dollar has a tendency to weaken against other currencies. With a shutdown taking place, the prospect of a US economic recovery could be disrupted. In this position, the rupiah will benefit. Jakarta Stock Exchange Composite Index-JCI also remains positive at 6,490-6,500, driven by domestic investor sentiment on prospects of an economic recovery in Indonesia.
Shutdown has happened before in 1995-1996 and 2013. At that time the rupiah exchange rate was almost not affected by the shutdown in the US. Due the nature being rather temporary or short term, which lasted for 2 weeks. In the context of preparing for the current shutdown, Indonesia’s foreign exchange reserves are still sufficient to stabilize the exchange rate. The latest figures in December 2017 shows our foreign exchange reserves to be at 130 billion dollars. As a safety net against external turmoil, foreign exchange reserves must continue to be improved in value and quality by encouraging non-oil and gas exports and foreign exchange from tourism industry. The Central Bank (Bank Indonesia) should continue to monitor the resilience of economic fundamentals against global pressures.
What is worrysome regarding the current shutdown is that it could take place long term or possibly more than 2 weeks. With US economic growth in 2017 at 3.2% in the third quarter of 2017, or the fastest was in the last 3 years, the shutdown will lower the outlook of the US economy.
Specifically, if the shutdown lasts long, Indonesia’s trade performance towards the US will potentially be disrupted, in that Indonesia’s export performance throughout 2018 could potentially decline. Based on BPS data in 2017, Indonesia’s exports to the US was accounted for 11.2 percent of total exports or US $ 17.1 billion. The government is urged to prepare for risk mitigation by expanding its export market to alternative countries so that the dependence on the US will decrease.
From the aspect of direct investment, during January-September 2017 based on data from the Investment Coordinating Board (BKPM), US investment realization in Indonesia was ranked number four, US $ 1.53 billion or up US $ 1.1 billion compared to the same period of the previous year. Positive trends in US investment in 2018 could be corrected due to a shutdown, plus the US policy reforms that come into effect. Under such conditions, the Government should continue investment reforms particularly in acceleration of licensing, deregulation and evaluation of its fiscal incentives. It is expected that the negative effects of reduced US investment could be off-set by the rise in investment from other countries.
The impact of a shutdown on financial markets will have implications on rising bond yields reflecting increase risks as well as foreign capital outflows from developing countries. Take note that throughout 2017, according to Bloomberg report, foreign funds generated out of Indonesia’s stock exchange (net sales) reached US $ 2.96 billion or nearly Rp40 trillion. In medium-term, foreign capital outflow may be influenced by a threat of a hike in the Fed rate as much as 3 times by the end of the year, geopolitical instability, US trade protectionism, and an increase in oil prices to 80 dollars a barrel. Under such conditions, the motor of economic growth coming from investment and exports could be affected. The 2018 economic growth projection is estimated at 5.1% (year-on-year). While the benchmark rate of 7 days repo rate is expected to remain at 4.25% in February 2018.
(Bhima Yudhistira)