Morning Briefing: Renewed Fears for Emerging Economies as Argentina Crisis Spreads

Argentine Treasury Minister Dujovne and Central Bank President Caputo highlight key G20 role in global governance - Photo by G20

JAKARTA (TheInsiderStories) – Good morning. Financial markets in emerging economies slid on Thursday (30/08) on renewed concerns over the spreading of the ongoing financial crisis in Argentina after its government announced that it has agreed for an early withdrawal of US$50 billion loan from the International Monetary Fund.

The loan was initially intended only as a standby facility with the Argentine government assumed that its economy would recover which meant withdrawal might not be needed.

The announcement sparked off fresh concerns that the Argentine government may default on its large debt which then sent the Argentina Peso crashing and forced its central bank to raise the benchmark rate to 60 percent from 45 percent.

The impact to emerging market including Indonesia is immediate. The Jakarta Composite Index fell 0.8 per cent to 6,019, while the Rupiah slid to 14,655 per US$1 from 14,643 per US$1.

Bank Indonesia’s Governor Perry Warjiyo reiterated that domestic economy is stable and the source of volatility is mostly external. “This compels us to respond with interest rate to maintain stability, to keep the government bonds attractive,” he said.

The central bank had raised the reference seven-day reverse repurchase rate by 125 bps this year as a response to the United States (US) Federal Reserve’s monetary tightening.

Fortunately, there are good news from the external environment too. In a bid to reach a compromise on ongoing trade spat with the US, the European Union said it is willing to go to zero tariffs on all manufacturing goods on reciprocal basis. This time, the European Union also offers zero tariff on car, which was previously not mentioned in trade talks between the US and EU.

Another positive development is the exemption of Indonesia’s steels and aluminium from the US government’s import tariffs policy. This will allow Indonesia to continue or increase exports of steel and aluminum to the US, which stood at $323.6 million in 2017.

However, while having access to the US market is important, the escalating tit-for-tat import tariffs may lead to a flood of cheap imports from China, which sees rising restriction to export to the US. And, due to overcapacity in China’s steel industry, there are concerns that China steel makers may seek to bypass US tariff by using a third country, like Indonesia, to enter the US market.

Trade is also an important agenda for Australia’s new Prime Minister Scott Morrison who will meet President Joko Widodo on Friday. This meeting will be followed by the announcement of Indonesia-Australia Comprehensive Economic Partnership Agreement, which would make Indonesia manufacturing base for Australian companies.

However, it is still unclear whether Indonesia’s wish for greater access of Australia’s labour market has been granted.

On politics, the opposition’s Vice Presidential candidate Sandiaga Uno accused the government to have controlled the Statistics Agency to produce data and information for its benefits. This is a very serious accusation and Uno must produce a strong evidence to back up its claims as the agency had been very transparent in its methods and procedures in collecting and collating statistics.

May you have a profitable day.

TIS Intelligence Team, Email: