Looking at Indonesian “Magiconomics”

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Anthony Budiawan Managing Director, Political Economy and Policy Studies (PEPS)

IO – “Magiconomics” is a term of economic policy that can break down economic theories in general. Indonesian Magiconomics is an abracadabra economic policy that has been implemented in Indonesia in recent years.

According to general economic theory, the exchange rate depends on the performance of the trade balance and current account balance. If the trade balance is in deficit, let alone a current account deficit, then the currency exchange rate will depreciate or weaken. The weakening of the exchange rate is very important, so that prices of domestic goods and services become cheaper and more competitive in the international market. In the end that is expected to stimulate exports and shrink imports, improving the trade balance and turning the deficit into a surplus.

Magiconomics Indonesia can bust up the theory. A deficit in the trade balance and current account did not depress the Rupiah. Economic conditions in 2019 can be said to have been stagnant. Economic growth hovered around 5 percent, lower than in 2018. International trade in 2019 contracted. Exports fell 6.94 percent, from US $180 billion (2018) to US $167.5 billion (2019). Imports fell more sharply, 9.5 percent, from 188.7 billion US dollars (2018) to 170.7 billion US dollars (2019). The 2019 trade balance still shows a deficit of 3.2 billion US dollars.

The current account balance in 2019 is also in deficit – even greater than that racked up in 2018. As of end-September 2019, the current account deficit was 22.5 billion US dollars, a slight increase over the same period in 2018, when a deficit of 21.3 billion US dollars was reported. Under such conditions the Rupiah should naturally depreciate, so that prices of goods and services in Indonesia become relatively cheaper, and the trade balance can turn into a surplus. This is what happened in 2018, when the trade balance and current account were in deficit. And the Rupiah depreciated IDR 933 in 2018, from IDR 13,548 per US dollar at the end of 2017 to IDR 14,481 by end-2018. The Rupiah even fell to IDR 15,253, on October 11, 2018.

Since then, Magiconomics Indonesia has begun to be applied more aggressively. In only about two and a half months, the Rupiah managed to strengthen from IDR 15,253 to IDR 14,481 per US dollar, and this strengthening continued in 2019, to IDR 13,901 per US dollar. This achievement is the result of Magiconomics. The mode is very simple. The results are quite encouraging. The Rupiah has strengthened sharply despite a triple deficit (budget deficit, trade deficit, and current account deficit). Therefore, the inventor deserves appreciation.

The Magiconomics mode is very simple. The government only needs to provide state debt securities (SUN) to turn the Balance of Payments (BoP) into a surplus. Thus, foreign exchange reserves surge.

The BoP becomes a surplus if the financial balance (i.e., foreign direct investment and portfolio investment) sees a surplus greater than the current account deficit. In this case, the Rupiah will strengthen. If the financial balance is not sufficient to cover the current account deficit, the BoP will still be in deficit; then Magiconomics is immediately applied. In this case, the government provides additional SUN, which must be purchased by foreigners, to make the BoP into a surplus and increase foreign exchange reserves. This additional SUN is called SiLPA (Time Over Budget Financing). That is, the Magiconomics policy instrument to strengthen the Rupiah is done through fiscal policy, achieved through doping. This SiLPA continues to rise, from IDR 22.2 trillion (2014) to IDR 36.2 trillion (2018), and IDR 52.1 trillion by end-November 2019.

What is the impact of Magiconomics on the national economy?

First, a stronger Rupiah makes domestic goods prices less competitive, and foreign goods relatively cheaper. The impact: exports are worse off, and imports rise. To staunch the rise of imports, efforts made to suppress them may exert a negative impact. The most common, for example, are import restrictions through the granting import quota licenses.

Second, for exporters, it’s like falling down a ladder – especially commodity exporters. Prices in dollars go down, and receipts in Rupiah also go down due to a strengthening Rupiah.

Finally, Magiconomics magic can only last as long as foreigners are still willing to buy the SUN, which is bulging greater and greater. One desperate way to lure them in is to promise high interest – higher in fact than that offered by neighboring countries. When the power of Magiconomics starts to fade away, the impact can be shocking – more powerful than a volcano explosion or tsunami. The trigger could be a failure to pay a corporate debt, either private or a state-owned enterprise. Jiwasraya can be one of the triggers. Or maybe Asabri?

In such a case, who benefits from Magiconomics? Of course, the debtors in foreign currency. Their debt in Rupiah becomes smaller, allowing them to pile on even more debt.