Money On My Mind: What the Recent IDR Stability Tells Us About Indonesia’s Current Account

….And I thought I was unstable.

On September 5, 2018, the Indonesian national currency of rupiah (IDR) was at its highest since the Asian Financial Crisis. This became a nation-wide issue since the local people start involving the past financial crisis in their discussion. The 1998 Asian Financial Crisis was a monetary disaster which involves the plummeting of several Asian currencies. In Indonesia, the crisis itself peaked around the third and fourth quarter of 1997, where Rupiah eventually exceeded the 15,000 threshold in June 1998. There are several factors that contributed to this monetary stroke, but I am most interested in looking from the period perspective of current account deficit. This interest came after reading an article on Bloomberg, in which a dataset obtained from International Monetary Fund shows that the Indonesian economy had already been in deficit for 17 years before the 1997-1998 crisis occurred. When Indonesia eventually recovered from the crisis, it started experiencing a 14-year streak on positive current account… until the deficit reemerged in 2012.

The question on everybody’s mind is, did this early September 2018 spike in depreciation happen because of Indonesia’s current account deficit? Well in order to answer that, we have to simplify what depreciation of a currency and current account deficit tells us. Firstly, a depreciation of a domestic currency, in this case IDR, against the US dollar, for example, is a fall in the dollar price of IDR. Secondly, the deficit in current account signals that any of its component category may be the root of the cause, one of which is trade account. If the trade account is proven to be in deficit, then the monetary value of imports is more than the monetary value of exports since the calculation is equal to exports minus imports. From both of these definitions, it is easy to roughly infer that the increasing reliance of imports causes the trade account to be negative, rounding up the deficit in current account. The increase in imports also signals that the home country puts more value into foreign products, thus creating a bridge between depreciation in IDR and current account.

Source: Giphy

Enter me in a meme.

Efforts to contain imports are currently underway, with the probability of chocolate and coffee lovers suffering the most. Chocolates and coffee are amongst the goods being reviewed for curbing imports, in which the government plans on imposing a higher import tax on them. As for controlling oil, the government is increasing the use of palm oil to reduce crude imports.

But hold up…

If you access the data of Indonesia’s current account through Bank of Indonesia’s website over the years, you could see that pinpointing everything on imports should not even be the primary concern. Based on the empirical numbers, the primary income component of the current account seems to be the most problematic one. It contributes the biggest negative value from year to year. If we break down investment income, we can see that most of the negative value comes from investment income. What does this mean? Numerically, the negative value means that Indonesia is more likely to make payments than receipts. Nationally, the higher number of payments means that most of the income went to foreign countries. This implicates that most of the investments come from foreign investors. Once those investors receive that sweet sweet dough, they bring them back to their country. What could’ve been a chance to spread more IDR into the global economy is wasted upon conversion. Using the logic of depreciation, this puts the value of IDR in a more inferior position compared to the foreign currencies.

After reading several sources, which are mostly from my former lecturers’ articles, I personally agree with a proposition that is moderately dependent on external affairs. The government could tap into the concept of generating more receipts from export-oriented investments. If the government works towards pushing this more, at least the investment income payment made to the foreign investors could be offset by the export revenue. A more certain suggestion would be to bring some of those investment income payment back to Indonesia. This would require a lot of diplomacy, in which the government should propose several incentive mechanisms in order to pique the foreign investors’ interest.

Being dependent on external affairs does not necessarily mean that the recent government’s proposition of curbing imports should be ignored completely, but an outward-looking one seems arguably easier compared to internalizing domestic consumers. Even if the government tries to encourage locals by imposing a higher tariff on imported consumer goods so they would participate more on the local economy, there is no guarantee that individual preference will not take over the minds of each ego. For instance, I like chocolate so much that I would be willing to reallocate some of my domestic spending to make room for Ferrero Rocher in my stomach. In another totally realistic scenario, if H&M is putting out sick indie clothing for the month, I personally wouldn’t be opposed to buying them, a decision which I would probably regret by the end of that month. In spite of this, if the government could correlate curbing imports with generating more investment income effectively, then the two policies can merge into a much more ideal proposition, although I’m not familiar with the mechanism of bridging the two, mind my knowledge gap.

All of this debacle should still be taken with a grain of salt as a suggestion. This analysis is nowhere near perfect as it only talked about the summary of the current account. Again, I am most interested only by seeing the phenomenon through the eyes of the current account deficit and how it could slowly be eradicated by a simple reliance on external affairs. This opinion didn’t really put in the time for further analysis on the entire balance of payment, which could mean a whole other thing for the previous analysis of current account deficit. Moreover, there are still some angles to approach this issue of IDR depreciation. There’s a great article that extends the analysis and you can access it here. If you were looking for some closure on how the current IDR stability won’t go berserk, you can click on the article via this Twitter thread.

References:
Mostly Bloomberg and the rational discussions on Twitter. Don’t worry, I only chose people that I went to college with who aced their Monetary Economics course cause I only got a B+. Or was it a B? Man, I’m nowhere near ready to discuss this.

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