Wall Street Journal by Ben Otto
September 3, 2014
JAKARTA, Indonesia—Indonesia is preparing for the end of the Fed’s easy-money program by moving to reduce foreign bondholdings and adding incentives against repatriation, hoping to mitigate sudden capital outflows and tighter liquidity in Southeast Asia’s largest economy, the country’s finance minister said.
Finance Minister Chatib Basri said in an interview that he expects the market shock stemming from the end of the U.S. Federal Reserve’s long-term bond-buying stimulus program, known as quantitative easing, will be worse than a year ago when tapering fears triggered an exodus of foreign funds from emerging markets world-wide. He said he has no plans for capital controls.
“I think there is a strong likelihood that the U.S. will [undergo] a normalization of its monetary policy sooner than we expect,” he said. “If that’s the case, then you would expect there would be tight liquidity in the global economy and it will affect emerging markets even more severely than what we [saw] in 2013.”
He pointed to strengthening economic and jobs data in the U.S. as signs that the Fed could start tapering in the first half of 2015.
The Fed’s expansive monetary policies since an economic downturn in 2009 have benefited countries such as Indonesia. Policy makers in the fast-growing emerging market kept monetary policy loose as capital flooded in, with investors searching for higher returns as U.S. rates headed toward zero.
But Indonesia was one of the hardest-hit countries in mid-2013 when the Fed hinted it was closer to turning off the tap. Foreign capital fled the near trillion-dollar economy, sending the local currency plummeting and helping pull economic growth below 6% for the first time in four years.
When the Fed later decided to keep the pace of its bond buying steady, much of that capital returned, with investors lauding several small but significant banking and fiscal reforms introduced during the exodus of capital. Mr. Basri said that the country’s relatively sound macrofundamentals better position it to deal with a shock today, but risks remain.
He forecasts economic growth will fall to 5.3% in 2014 after hitting 5.8% a year earlier. His official ministry forecast for growth next year is 5.6%, but he said Wednesday that global headwinds,including hampered investment growth that could result from higher interest rates in the U.S., as well as decreased demand from China for some of its biggest exports,could take that down further to “above 5%.”
The country is wrestling with the end of a commodity boom that has exposed its overreliance on resources exports, and with a ballooning bill for subsidized fuel prices that have left it with little money to invest in infrastructure and develop the manufacturing industries it needs to modernize its economy.
With a month and half to go before a presidential handover, Mr. Basri said he’s pushing for new ways to keep foreign money in the country in preparation for tighter liquidity when the Fed ends its program. A pending regulation from his ministry will offer tax allowances to companies that reinvest their profits here, freeing them from paying dividends taxes.
He said another measure being developed by the central bank would potentially require a company borrowing money overseas to ensure that foreign exchange is available for 1-3 months before the debt comes due.
Mr. Basri said also said he’s worried about increasing bondholdings among foreigners, which recently hit a record of around 37% of all government bonds.
“It’s very important for us to diversify the source of financing,” he said.
He hopes that proportion can be reduced by tapping the country’s Haj pilgrimage funds—which he projects to reach $15 billion by 2020—and social security funds. On top of selling bonds domestically, Mr. Basri is seeking to allow his ministry to sell securities to these government institutions in private placements.
The potential capital outflows are illustrated in Indonesia’s budget draft for 2015, which assumes the rupiah will weaken almost 2% from current levels to 11,900 to a dollar.