Most potent tactic faulters

Ichsanuddin Noorsy
(Indonesia economic and political observer)

IO – On September 25, 2018, in a dis­cussion concerning the state budget plan in the Republic of Indonesia’s House of Representatives’ (DPR-RI) Media Center, I predicted, in front of dozens of journalists from various digital and print media, that The Rupiah exchange rate against the US dollar would exceed Rp 15,000. My prediction was actually a reiter­ation of the same one I made once three years ago and once six months ago in the same place. I am certainly not happy that my prediction came true. The prediction I made was meant to caution us all, so that we would take anticipatory steps, and was based on the fact that our fun­damental macroeconomy was in a fragile state. Now the psychological threshold has been broken and as of my writing, the Rupiah continues to weaken, even though the Fed will again increase its interest rates near the end of 2018.

The psychological threshold is one that shows the limit of strength or weakness a psychological state can accept. In constructing a psy­chological threshold concerning the weakening of the Rupiah, Rp 15,000 is the numerical value that signals a serious problem with the currency. If the Rupiah continues to weaken, the public will have a difficult time ac­cepting its decline. This means that the public’s trust in the Rupiah, a currency they use and measure wealth with, will also melt away.

The growing distrust of the public towards the Rupiah shows that there is something wrong with the econo­my, which has resulted in the me­dia using headlines that warn of an impending 1998-type crisis. These headlines signify that a crisis of trust has bloomed, while the government has announced that unemployment is down, poverty is down, the Gini ratio has improved, the economy has grown 5.23%, and our current economic situation is caused by external factors (I named them the nine challenges in the September 25 discussion in the media center), but in fact our government is faced with a current account deficit (3% of GDP), a budget deficit, a primary deficit (to pay off debts, the government has to create new debt), and a deficit in the balance of payments of US$ 4.3 billion in the second quarter of 2018. Foreign exchange reserves have also shrunk, from US$ 130 billion at the beginning of the year to US$ 117.9, equivalent to 6.8 months of imports or 6.6 months of imports and debt pay­ments. Two days ago, out of the Rp 50.11 trillion government debt papers offered at auction, only Rp 20 trillion were absorbed by the market. This is after Bank Indonesia (BI) increased their interest rate to 5.75%.

The numbers are evidence that a crisis of trust is continuing to influ­ence public perception that govern­ment policies and programs cannot deal with the fundamental problems in the economy. The go-to neo-liberal policies are as if to say that the gov­ernment cannot defend the nation’s economy. The public is forced to take measures to defend itself from the attack on their prosperity of decay­ing exchange rates. Imagine if the exchange rate assumed by the 2018 state budget was indeed accurate, then the exchange rate has fallen be­tween 11.6% to 12.6%, meaning even with 5.23% growth, the Rupiah’s pur­chasing power has actually declined. In this condition, in the September 25 discussion I stated that Indonesia’s gross domestic product had actual­ly shrunk when taking into account Rupiah’s decline. In other words, sur­plus from the national economy has been transferred abroad.

W h e n l o o k i n g a t i n fl a t i o n , BPS-Statistics Indonesia’s 2018 So­cial Economy data shows a continu­ing increase in the food, material and foodstuffs price index. This data is in line with the increase in food prices. The increase in the price of electrici­ty has also pushed this; however, the same phenomenon has not occurred with fuel, even as WTI crude oil prices have surged by 20% in 2018 to US$ 75 per barrel. In 2019, prices are predicted to reach US$ 100 per bar­rel, amidst slowing global economic growth. So, why is inflation seeming­ly under control at around 3.18%?

There are a number of factors. For instance, the cost of healthcare has been subsidized by the Social Security Administrator for Health (BPJS Kesehatan) which itself is in deficit; education costs are included in the state budget and are subsi­dized by Indonesia Smart Cards and the Family Hope Program, and the conditional cash transfers through the Prosperous Indonesia Cards, the prosperous rice program, and the transfer of Rp 766.16 trillion of funds to various regions across In­donesia – all helping to subdue in­flation. Imported goods (cost-push inflation) did not cause inflationary imports to be subsidized by the state. However, how are the balance sheets of PT Pertamina and PLN? The shut­down of the 35GW project, the letter from the Ministry of Finance to PLN, the increase in the price of electricity and PLN’s large losses have proven that the weakened Rupiah has mag­nified the two state-owned enterpris­es’ troubles. Another indicator is the increase in car, motorcycle and elec­tronics prices.

Many policies have been put for­ward to try and halt this, such as in­creasing import tariffs, recommend­ing foreign exchange export proceeds to be kept at home, increasing inter­est rates, decreasing visits abroad, and pushing the use of biofuel (B2). Previously, Indonesia happily import­ed food, and fuel supply depended on other nations when the foreign debt was increasing and 40% of govern­ment debt papers were owned by foreign money. This has however decreased, with the increase in the federal fund rate. The penchant for imports and increasing investment portfolios was followed by four types of deficits, which forced Minister of Finance Sri Mulyani to be hon est about the fragility of Indonesia’s economy. BI, however, was still con­fident that its monetary instrument was able to hold back the decaying exchange rate.

When looking at exchange rate data from 1964 until now, which I distributed to hundreds of journal­ists, foreign money dominates stock ownership of national banks, foreign stock ownership of the mining and oil industry, and the dominance of private entities on the distribution of goods and payment systems with the continued deindustrialization, has made it difficult to argue against the ineffectiveness of fiscal and monetary authorities, amidst the strong posi­tion of foreign money in the nation­al economy. I have distributed this data to the House of Representatives’ Commission XI and Commission VI, other institutes, and the Constitu­tional Court, from when I was called as an expert witness in the suing of the Electricity Law in December 2004. This data is continually being updat­ed. The irony is that those who have the authority in their respective areas of power act as if they are helpless to attack the root of the problem. I ex­pressed this in April of 2015 when a number of constituents and public figures planned on suing Law 24/199 concerning Foreign Exchange Traffic and Exchange Value Systems, and Law 25/2007 concerning Capital In­vestment. Both of these laws are an important part of the economy’s fun­damental problems. As long as both these laws and other liberalization laws concerning finance, banking and trade are in effect the government and BI’s most formidable tactics will always falter and the 3F (food, fuel, financial) crisis will continue to haunt the economy. In other words, If the 45th US President Donald Trump is deglobalizing (but not anti-global), why shouldn’t we try to look inward while evaluating? Have we estab­lished the sovereignty of our nation’s economy? Is the US not the economic prophet of free-market worshippers? (Ichsanuddin Noorsy)