JAKARTA (TheInsiderStories) – Good Morning. Last week, Indonesia’s central bank (BI) reported foreign exchange (FX) reserves fell to US$119.8 billion as end of June compared to previous month $122.9 billion. Meanwhile, to simplify investment permit in the country, today the government launch Online Single Submission (OSS).
BI said on June 6, the FX reserve decreased was attributed to measures to stabilize the rupiah against the U.S dollar and foreign debt payments by the government. However, the Bank gave an assurance that the current FX reserves were enough to finance 7.2 months of imports or 6.9 months of foreign debt.
The central bank believed that the FX reserves could support the nation’s macroeconomic and financial system stability. The FX reserves have been decreasing since early this year. In February, the foreign exchange reserves fell to$128.06 billion after reached the highest level of $131.9 billion in January.
The decrease was mainly attributed to a weaker Rupiah, which had occurred since February. The currency has surpassed the psychological level of Rp14,000 per U.S dollar in the past few weeks.
To help the rupiah regain its strength, BI was increased its seven-day reverse repo rate twice in May and June The BI board of governors has hiked its benchmark rate from 4.25 percent to 4.75 percent in May, and 50 bps to 5.25 percent in June.
Meanwhile, President Joko Widodo and his ministers meet today to preparing the government’s step’s deal with the trade war issues of the U.S and China. Before the meeting his ministers met yesterday to prepare the material meeting with him in Bogor Palace.
The trade war between U.S-China began to clap on Friday (06/07). The country officially impose import tariffs on Chinese products with worth of $34 billion.
Beside China and Europe, U.S reportedly also evaluating about 124 Indonesian export products, including textiles, plywood, cotton, and some fishery products such as shrimp and crabs. The evaluation was conducted to determine what products are still eligible to receive generalized system of preferences (GSP).
GSP itself is a trade policy of a country that gives import duty import duty on export product of recipient country. If this GSP is eliminated, then the import duty on Indonesian products to the U.S becomes more expensive.
In recent months, investors worried on the trade war between the U.S and China and creating panic in the financial markets. U.S’s President Donald Trump also threatened the tariff of $400 billion of Chinese goods if the Chinese government responds to the policy even so threatened Europe with a 20 percent tariff for imported cars.
Not only China, various countries have taken retaliatory measures against U.S tariffs on steel and aluminum. Canada, Mexico, the European Union and China have imposed or announced plans to retaliate, worth around $75 billion in tariffs for U.S-made products.
In our view, the trade war will bring negative impacts to the developing countries, including Indonesia. Furthermore, we look the trade war potentially shifted the exports of the two countries to Indonesia. China potentially shifts the steel and aluminum exports to Indonesia, while the U.S will seek the new markets for fruits and soybeans.
This condition will worsen Indonesia’s trade deficit. According to the Statistics Indonesia data, Indonesia booked $13.89 billion deficit in non-oil and gas trade balance deficit to China. In addition, the trade war potentially reduce the volume of the global trade that will hurt Indonesia’s export-oriented industries. As a result, it will worsen the country’s trade deficit.
Furthermore, the trade war will exacerbate the Rupiah against the U.S dollar as the investors shift to the developed countries currencies. The weakening rupiah simultaneously increases imported raw material that will cause higher production cost.
Not only hurt the local industries’ competitiveness, it also potentially harms the people’s purchasing power. Given the implication of full-blown trade war could be extensive, the government does not seem to have definite anticipatory measures to minimize its impact.
Especially when looking at persistent Indonesia’s trade balance deficit Indonesia booked $1.63 billion in the trade deficit in May 2018. Indonesia recorded $21.32 billion in export to China, lower than the import from the country of $35.51 billion.
Nasution earlier said the government has four anticipative steps to minimize the impacts of the trade war. The second step, the government will discuss with the U.S government and China especially if there is dumping policy. Third, the government anticipates the impact of rising interest rates in the U.S against the movement of the rupiah exchange rate.
Fourth, the government ensures that vocational training and education is implemented as soon as possible. The education and training are highly important as the human resources enhanced by the infrastructure will significantly improve manufacturing industries.
The four anticipatory steps mentioned by Nasution are appropriate to minimize the impacts of the trade war, but it takes a long time to be implemented. Indonesia needs to find other strategic steps that can be implemented in the near future because the trade war is near at the hand.
How’s the market reaction? Several economist said, the weakening of rupiah is the effect of trade war. Furthermore, the rupiah weakening also affected by Indonesia’s persistent current account deficit, which this year is exacerbated by a trade deficit.
In the recent weeks, the local currency become one of the worst performing in Asia compared to the greenback. Unlike the Rupiah, a number of analysts predict the Jakarta Composite Index(JCI) may keep its strength but some projected a potential profit-taking take by investors.
Last week, Rupiah managed to close higher against the greenback. Several analysts said that the decline in FX reserves in June is potentially make rupiah depressed. Furthermore, they said, the U.S employment data released last weekend did not significantly impact on the rupiah movement.
JCI is expected to remain depressed due to a number of domestic and external sentiments. At the end of last week JCI closed at 5.694, or down 0.77 percent.