Markets Calm … for Now
Category: Column By : Haryanto T. Budiman Read : 303 Date : Monday, September 04, 2017 - 12:15:17

The global financial markets have been relatively and unexpectedly calm for several months, largely attributed to less political uncertainties, particularly in Europe. Even as Brexit negotiations continue, the Dutch and French elections were seen as a vote in favor of the EU, and helped allay concerns of a euro zone breakup. Thus, the Euro has rebounded significantly, strengthening more than 10% against the U.S. dollar so far this year, and should have its best year since 2003. Indeed, the volatility in the broader currency markets, especially across emerging markets, has fallen; the J.P. Morgan emerging market FX volatility index has hovered at a three-year low since May.

Politics aside, global growth is quietly gaining momentum. The U.S. economy continues to strengthen and the European economy is in its fifth year of growth. China’s economy is improving too, growing at a better than expected 6.9% in the second quarter. The strong figures bode well for emerging Asia; our house view for global emerging market growth is 4.8% for 2017, up from 4.1% in 2016. Our global growth target is 3.0% this year, compared to 2.6% last year.

Potential risks are the normalization of the Fed’s balance sheet—which could start in September—and a possible U.S. tax system overhaul, leading to American companies repatriating profits from overseas. Both could impact the dollar’s liquidity and value, and fund flows into emerging markets.

Indonesia’s macro picture remains mixed. The economic narrative is undoubtedly strong: the rupiah has been relatively stable for the last 12 months, thanks in part to BI policies requiring rupiah for domestic transactions, and better management of non-bank foreign borrowing. Inflation is relatively benign—within government targets—and growth stable around 5%. Standard & Poor’s in May finally raised the country’s credit rating one notch to investment grade, coming in line with Moody’s Investors Service and Fitch Ratings.

Concerns, however, remain on the budget, with the deficit seen widening this year due to lower revenues and increased spending. The successful tax amnesty program buoyed revenues last year, but that program ended in March, so what’s next to boost revenue? On expenditure, energy subsidies—long drawing resources away from other priorities—rose by Rp 12.6 trillion in the revised 2017 budget. While government should provide aid to the poor and the working poor, more is needed to ensure the subsidy achieves its original objective. A tiered system for the truly disadvantaged could be considered.

Meanwhile, massive effort is needed to cut bottlenecks in priority infrastructure projects. Many initiatives, especially in the power sector, remain delayed from operational and licensing factors. In consumption, the government must boost consumer spending, which accounts for over half of GDP. Any government policy revision must be quickly and effectively done, before the focus turns to politics next year, with critical gubernatorial elections in the second half, and parliamentary and presidential elections in 2019. The time to act is now.  



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