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View all search resultsIndonesia’s strategy for riding the global economic slowdown
We can expect the rupiah to depreciate dramatically as US dollar liquidity dries up and global pandemonium spreads before rebounding somewhat, as seen after the initial shock of C0VID-19.
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undefined (Antara/Muhammad Adimaja)
T
he United States Federal Reserve could be close to a tipping point. Its aggressive monetary tightening -- with rate hike totaling 300 basis points (bps) -- in the past few months has failed to push inflation lower as it is caused by the fundamental shortage of goods in energy and labor.
It has had a destabilizing effect on the global financial market as a strong dollar pushes bond yields up and drains liquidity from global markets. A global recession coupled with a financial crisis could be underway, which could prove too much even for the Fed to handle.
There are already signs of it. The Fed’s swap lines have come back into action with liquidity to the European Central Bank and Swiss National Bank increased significantly in the past month. Volatility in the Eurodollar, bond and forex markets has reached pre-global financial crisis levels. The dovish voices at the Fed, most notably San Francisco Fed president Mary Daly may be too late.
The resulting disastrous financial crisis could force the global economy into a hellish stagflation scenario where central banks are forced to loosen monetary policy during high inflation. Meanwhile global economic growth prospects seem to be bleak with the ongoing property crisis and dynamic zero C0VID-19 policy in China, and the diverging global economy hampering free trade and investment.
The recovery from the crisis would be significantly slower than the last global financial crisis as a sharply decoupled and divided world will reduce global cooperation. The result of recovery is likely to be uneven with reduced standards of living for a vast majority of the global population.
For Indonesia, the outlook is still better, but there will be some suffering in the near to midterm. Due to low exposure to the global economy, the effect of a major global downturn will be rather muted. Domestic growth prospects are still solid albeit with an ongoing domestic slowdown that may accelerate with recent public concerns of an impending global recession.
The ongoing tax reforms will increase the government’s tax base and improve revenues. Foreign investment may dry up as reduced global liquidity would deter investors, but the domestic investment is expected to be strong.
