Not 2018, the Government Must Anticipate the 2030 Crisis
By : Herry Barus And Aldo Bella Putra | Monday, September 10 2018 - 17:30 IWST
Rupiah (Foto/Rizki Meirino)
INDUSTRY.co.id - Jakarta - The Rupiah is facing a ordeal. The currency crisis of Lira Turkey, Argentina, Brazil and South Africa gave negative sentiments in the midst of a strengthening US dollar as the US economy grew high.
On the other hand, Indonesia also experienced a current account deficit as a result of high imports that could not be offset by an increase in exports. This raises again the issue of Indonesia as part of fragile five, vulnerable countries fall into a crisis along with Turkey, Brazil, India and South Africa.
Investment Strategy Director and Head of Macroeconomics PT Bahana TCW Investment Management (BTIM) Budi Hikmat said the significant current account deficit and dollar strengthening were the two fundamental pre-conditions underlying the 1998 monetary crisis. BTIM, a subsidiary of PT. Bahana Indonesian Business Development (Persero) believes that the current development does not lead to a destructive economic crisis, the 1997-1998 monetary crises.
The 1997-1998 monetary crisis, according to Budi, stems from a currency crisis, where the Rupiah weakened sharply and spread into a banking crisis. The crippling of the financial intermediary function, not only slowing economic growth, also triggered the destruction of financial assets which supported the nation's prosperity.
The rupiah exchange rate crisis was based on overvalued rupiah which was maintained through a fixed exchange rate system or controlled by the government and not in line with the strengthening trend of the US Dollar. This triggered the actions of the corporate and banking sectors to accumulate foreign debt.
At that time, Indonesia had no governance of state debt, especially aoad, and strengthening the administrative system for tax collection. Moreover, the mobilization of non-banking domestic business financing through the capital market is also limited.
Banking credit is also high due to weak banking supervision. Banking and dangerous mistakes when it is short-term foreign currency debt to finance long-term rupiah investment projects.
When the Rupiah exchange rate weakened following the regional currency, the financial condition of the company and banking deteriorated drastically. Debt expense rises and asset value falls.
"Banking at that time is like a proverb, nothing right in the left and nothing left in the right. The left side is a bulging asset. To the right of the depositors withdraw funds. As a result, capital is eroded and must be addressed through a banking recapitalization policy that is very expensive, "explained Budi.
Now the conditions are different. Banking is much better with a capital adequacy ratio (CAR) that exceeds international standards. The country already has more transparent and careful debt management, a maximum deficit of 3% of GDP. Flexible exchange rate system (flexible exchange rate) which makes the company aware of the risk of currency exchange risk if it owes.
New Normal Trigger Refinancing Risk
The weakening of developing countries' currencies against the US dollar, including the Rupiah, is backed up by the outflow of foreign capital (capital outflow) which has so far been needed to finance the refinancing risk deficit.
This was due to the increase in interest rates of developed countries and tightening of liquidity by the US central bank The Federal Reserve (The Fed), in line with the improving economic growth prospects of the United States. The end of low interest rates is the reality of "new normal" that must be faced.
However, global liquidity remains abundant. This can be seen from the yield or yield of bonds in a number of low developed countries. For example, 10-year bonds in Japan amounted to 0.14% and Germany 0.4%. Meanwhile, developing countries must increase bond yields and pay more to finance the current account deficit.
Anticipating the 2030 Crisis
PT Bahana TCW Investment Management President Director Edward Lubis appreciated the various steps taken by the government to stabilize the Rupiah so that the momentum of economic growth continues.
"Quick steps to maintain economic growth are crucial to prevent the risk of the crisis in 2030, where there is a fear of crisis risk due to 'growing old before growing rich' in 2030 according to the 2014 World Bank Report," Edward said. <> <> Government efforts must be complemented by increasing financial skills that become a kind of sufficient condition so that we have sufficient funding in old age.
The improvement in the current account deficit is appropriate for controlling the rupiah through the productivity of the real sector. The 2030 crisis can be prevented by increasing the productivity of citizens' assets.