Return of Global Volatility – The “New Normal”
    Category: Column By : Haryanto T. Budiman Read : 1313 Date : Wednesday, November 30, 2016 - 11:13:03

    The outcome of the U.S. presidential election came as a shock to the global markets. While president-elect Donald Trump delivered what can be described as a controversial campaign, he was never crystal clear about either his vision or plans for the country. The initial selloff on Wall Street was naturally expected. What was surprising, however, was the swift rebound of U.S. stocks soon after—markets seem to speculate that Trump will unleash a sizeable stimulus package resulting in more job creation and higher inflation, boosting the U.S. economy. That could potentially trigger faster than expected tightening in the country’s monetary policy. Having said that, without clearer direction from the president-elect and his transition team, it is unclear how long the bull sentiment in the U.S. will last.

    A number of critical yet unanswered questions, remain: (1) Will the U.S. implement a protectionist policy that could potentially trigger trade wars? 2) What would be the real impact of the new administration’s stimulus package on growth and inflation? (3) Will the tax reform implemented this year have a real positive impact on the economy? (4) How about the rest of campaign promises that are quite controversial? (5) How does the new administration strike a balance between growth and regulation over the next four years?

    Until a new cabinet is in place, nobody really knows the answers to all those questions. This uncertainty, along with planned elections in key European countries in the coming months, suggests that market volatility will likely to stay throughout 2017.

    Although the Indonesian economy undoubtedly has solid fundamentals, in an increasingly interconnected world, global market volatility could still have an impact on the country. Temporary market correction and portfolio rebalancing by investors should be accepted as part of the “new normal.” When that happens, the monetary authority should step in to soothe the market and not take drastic measures that would only be effective in the short term. Injecting the necessary liquidity and intervening in the forex and bond market are necessary to alleviate anxiety in a turbulent market. It is encouraging that the Indonesian central bank acted swiftly during the recent market volatility, which had an immediate calming effect on financial markets.

    As Indonesia’s economic fundamentals should not be affected by the political developments in the U.S., it is important that the government consistently implement reform packages. Deregulation and reducing bureaucracy should continue in order to attract real money from investors who have a long-term view on the economy. At the same time, the government should maintain security and stability to provide a conducive investment climate. It is also the right time for the government to start tackling a number of critical medium and long- term challenges such as legal reform and also educational reform. There are no easy fixes on both issues but we must start now to have a sustainable impact.