Magiconomics and Presidential Instruction: Conflicting messages?

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

IO – The Rupiah exchange rate has been strengthening since the end of 2018; even though it fell all the way to IDR 15,253.00 per USD on 11 October 2018, the Rupiah rallied to IDR 14,481.00 by the end of the year. Such a dramatic recovery occurred within less than three months. Fantastic! In fact, throughout 2019, the Rupiah continued to strengthen, until it reached a rate of IDR 13,901.00 per USD!

Many people are amazed at this rapid and continued increase. Praise flows like a river, on how good Indonesia’s economic performance lately, even though they wonder about this economic miracle. Why a “miracle”? Because the 2019 trade balance remains in a great deficit of USD 3.2 billion, while the 2019 current transaction balance is also in deficit, one even worse than that recorded in 2018: Jan-Sep 2019 deficit was USD 22.54 billion, while Jan-Sep 2018 stood at USD 21.3 billion.

In such a dire economic situation, the Rupiah exchange rate would normally weaken. However, recent Indonesian economic policies have succeeded in breaking down the accepted condition for “normalcy”. It is no miracle nor magic that has caused the Rupiah exchange rate to strengthen: it is indeed the successful result of economic policies aimed specifically at pumping the Rupiah exchange rate. Therefore, with such results that defy normalcy, it would not be improper to call such economic policies “Magiconomics”. Look at this more closely: the Rupiah exchange rate on Friday, 24 January 2020, was very strong at IDR 13,632.00 per USD. With continued application of Magiconomics, empowering the Rupiah further to IDR 12,000.00 per USD does not seem impossible. 

However, Magiconomics also has its destructive side. Strengthening the Rupiah means that the price of Indonesian products in USD is steeper. The current Rupiah exchange rate increased nearly 11% from its low on 11 October 2018. Higher prices mean relatively poorer competitiveness, which would potentially affect exports, especially for relatively homogenous commodities: the agricultural and industrial products that we are best known for. Meanwhile, imported products such as textiles and footwear, are becoming more attractive for being relatively cheaper, thus pumping imports. 

This is in direct conflict with the Presidential instruction to cover the trade balance deficit and turn it into a surplus as quickly as possible. The President wants to boost exports and cut imports, while strengthening the Rupiah will potentially damage exports and heighten imports – exactly the opposite of the Presidential Instruction.

Indonesia’s economic condition for the past few years has been fragile. Rupiah strengthening through Magiconomics actually does not represent brilliant economic performance. This strengthening is only an image created to make it seem that Indonesia’s economy is in a healthy state, while actually it is not, as the Rupiah did not strengthen naturally through foreign currency surpluses responding to trade balance and current transaction balance surpluses. On the contrary, Rupiah was strengthened through “financial doping”. The Rupiah is being forced to strengthen by issuing more Government Bonds (surat utang negara – “SUN”) than what we need, and appealing to foreign buyers to invest in them.

As explained above, the Rupiah rose strongly in Quarter IV of 2018, moving from IDR 15,253.00 per USD to IDR 14,481.00 per USD, while for the first nine months of the year, foreign reserves plummeted to minus USD 15.4 billion, which in turn caused the Rupiah to crash to over IDR 15,200.00.

This increase was caused by a significant (USD 5.9 billion) bump in our foreign reserves, up from USD 114.8 billion at the end of September 2018 to USD 120.7 billion as of the end of December 2018. This increase was obtained from “financial doping”, i.e. by increasing the Government’s foreign debts by USD 7.1 billion for Quarter IV-2018. This is Magiconomics; this is “financial doping”. The Rupiah rose significantly, despite a deficit record of USD 5 billion in the trade balance for the final three months of 2018. 

In 2019, our foreign reserves as of the end of September 2019 rose by USD 3.7 billion, with the consequence that the Rupiah also strengthened. This increase was obtained from the Government’s foreign debts, which, up until September 2019 (latest quarterly data), rose spectacularly, to USD 11.2 billion. However, Indonesia’s fundamental economy is still extremely fragile. Our trade balance still suffers a deficit. The strengthening of the Rupiah principally weakens our exports, while it also encourages imports. Therefore, isn’t this policy, the Magiconomics of Rupiah doping, actually against the Presidential Instruction to reduce imports and raise exports?