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The Indonesian rupiah recently hit a record low against the US dollar, sparking renewed debate about the country’s economic outlook. But beyond the exchange rate, what does the rupiah’s performance tell us about the health of Indonesia’s economy, investor confidence, and the challenges facing President Prabowo’s administration?
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00:00Indonesian rupiah recently hit a record low against U.S. dollars,
00:03sparking a renewed debate about the country's economic outlook.
00:07But beyond the exchange rate, what does the rupiah's performance tell us
00:11about the health of Indonesia's economy, investors' confidence,
00:15and the challenges facing President Prabowo's administration?
00:19Joining us virtually is Dr. Siwagi Dharma Nagara,
00:22Senior Fellow at the Asia's Yusof Isha Institute.
00:25Thank you so much, Dr. Siwagi. Good morning.
00:28Thank you so much again for joining in Niaga Awani.
00:30First of all, the rupiah recently touched the historic low
00:33of around 18,000 Indonesian rupiah against the U.S. dollar.
00:37So beyond global factors such as strong U.S. dollars,
00:41what do you see as the key drivers behind the rupiah's recent weakness?
00:48Thank you for having me.
00:49I think there are a couple of factors that influence
00:53the weakening of rupiah at the moment.
00:56One, you already mentioned the external factor about the U.S. dollar strength
01:01and also the geopolitical uncertainties
01:04and investor risk of aversion to move towards the safe heavens.
01:11And we also see that there's an increase in terms of demand for U.S. dollar for imports.
01:17And, yeah, I think domestically there's another important factors
01:22that also play a role in the weakening of the currency,
01:27including the credibility of the policy direction under the current government.
01:34And, yeah, I think investors starting to get worried about the direction of the policy
01:40of the governments that becomes more and more state interventionist.
01:46And also, you know, nearly three decades after the Asian financial crisis,
01:51you know, comparisons are once again being made with the 1997-1998 situation.
01:56How different is it in terms of Indonesia's economic position today
02:00as compared to that period?
02:02And should investors be concerned about this?
02:06Yeah, I think a lot of people always compare the situation with the 1997-1998 Asian financial crisis.
02:14But to me, the current situation is quite different.
02:19Again, we already have a very different fundamental.
02:23The banking sector has been improved in terms of management.
02:28Also, the foreign debt management has been much better.
02:33And we also see that now the macroeconomic stability or policy are very much different
02:42compared to the 1997 crisis.
02:45But that said, I think we should not rule out the possibility of returning to the 1997-1998 crisis
02:56if the policy credibility continue to weaken
03:01and then investors started to lose their confidence in the market.
03:06And we will have kind of massive capital outflows like what happened in the 1997-1997 Asian financial crisis.
03:17So while the situation is different, we should not rule out the possibility
03:22if the government does not really address the concern of the investor and the markets.
03:29Dr. Suwagi, some observers argue that, you know,
03:32the exchange rate alone does not reflect the strength of an economy.
03:35In your point of view, what indicators basically should we be looking at
03:42to assess Indonesia's economic fundamentals at this point of time?
03:47Yeah, I think exchange rate is only one macro indicators that are important for the market.
03:54But other economic indicators need to be monitored as well.
03:59In real sector, we need to watch out the real GDP growth and then also the inflation rate
04:06and then the fiscal position, the debt-to-GDP ratio,
04:11and then the government ability to serve the debt.
04:15And there are many indicators, but I think we should be put kind of attention on the currency
04:26because this reflects the market confidence on the economy.
04:31While many maybe government officials saying that rupiah has been undervalued
04:38or it's not a reflection of the real economy, but this is also an important indicator
04:45that shows how confident the market or investor on the policy direction of the government
04:53and the overall macroeconomic outlook of the country.
04:57And also, Doctor, Indonesia has long discussed the possibility of re-denominating the rupiah
05:05by removing several zeros from the currency.
05:08Do you think current conditions make such a reform more likely
05:12or is the idea still politically and economically challenging?
05:19Yeah, I think this idea, I believe, will not solve the structural issues in the economy.
05:26So, as you mentioned, there has been long discussion about implementing this re-denomination policy.
05:36So, removing the zeros from the currency will not solve the real fundamental issues
05:41of the weak investor confidence, right?
05:46So, what is more important is to solve the real structural issues within the economy
05:54to strengthen the rupiah.
05:57So, rather than doing a cosmetic policy kind of to fix the problem,
06:04the government needs to take more brave reform, economic reform,
06:11to solve the problem in the, like, macroeconomic management and fiscal and monetary policy.
06:19I think the root cause of the loss of confidence is in the area of fiscal spending,
06:27which is considered as not prudent.
06:30And investors are worried about the increase in terms of fiscal deficit.
06:37And this is very critical for a country like Indonesia that continuously depends on foreign debt
06:45to serve its fiscal spending.
06:48So, re-denomination technically just removing zeros,
06:53but it has not really solved the real issues of the economy.
06:58Talking about the real issues of the economy, the structural issues,
07:01you mentioned about the fiscal consolidation, fiscal prudence and all that.
07:09How do you see that Prabowo's administration is going to in terms of having the right fiscal trajectory?
07:18Is the administration looking at the expansionary budget or more into the austerity side of it?
07:25How do you go about it in terms of managing economy during current geopolitical crisis
07:33and also other challenges globally?
07:37Yeah, this is a very important question.
07:40I think the priority for the current government is to restore the credibility and trust on the policy of the
07:50government on the economy.
07:53And it's not easy.
07:55We know that the signal from the government has been quite mixed and very unclear.
08:02On one hand, the president said that Indonesia is open for foreign investor.
08:09But on the other hand, we also see that the policy of the state becoming more and more state-driven
08:17using a state-owned enterprise, including Danantara, to push for all the strategic investment programs
08:24from downstream to food estate, energy, and everything that not really related to the improvement of growth acceleration.
08:40So I think this is a very tough situation for Indonesian government,
08:46how to restore the credibility and trust from the foreign investor
08:51that already see that the government has been less and less pro-market at this time.
08:59And yeah, I think if the trends continue,
09:01we may expect that the rupiah will continue to weaken.
09:06And of course, the eventual impact will be on the real economy.
09:13We will see that the inflation will start to increase because of imported inflation.
09:18Also, the growth will be affected because now central bank has increased interest rate, right?
09:26So with the rise of interest rate, it means that the real sector will bear the burden for the economy.
09:36And yeah, I think we will see more slower credit growth.
09:39And this will affect on the overall goal of the achieving higher growth of the current administration.
09:49Speak, there's a report that the protests organized by students will take place in Jakarta.
09:55This morning, they basically have five demands.
09:58Firstly, of course, they asked the government to stop wasting state budget funds in that sense.
10:04And second, they demanded lower prices for basic goods and soft fuel.
10:08And the third one, the MBG, the free nutrition meals.
10:13And also the fourth one, they demanded the end to military involvement in civilian affairs.
10:17And of course, the fifth one, the President Prabhu Oswabiyanto to admit that government's mistakes
10:21and also take responsibility for the problems that have occurred.
10:25Now, these are the general demand that the students are expected to be invoicing out during the protests this morning.
10:35But do you see that this is really related to the structural problem that Indonesia is facing for many years
10:41before this?
10:42And what is it that can be done, the low-hanging fruit, so-called, in Prabhu Oswabiyanto's administrations to solve
10:51this problem, at least,
10:53given that the world is facing quite a challenge in terms of economic growth?
10:59I think the low-hanging fruit is to listen to what are the main concerns from the general public, right?
11:07The general public are very concerned about the government spending that they consider are not really beneficial for the economy.
11:15Like the free lunch program, there are a lot of misappropriation and there's a report about misimplementation or implementation issues,
11:26food poisoning.
11:27So, government needs to address this issue right away.
11:32And it seems like the President's action to remove the head of the agencies that involve or are responsible for
11:41free lunch program is not enough
11:43because the program is still being implemented and it's still being expanded.
11:49So, what the public needs to see is that the government really seriously take the concerns of the people by
11:59considering to maybe relocate or touch this program
12:07so that it will not waste the tight fiscal space that the government currently has.
12:15And I think that is the move that can calm the people, the demonstration,
12:24because there are a lot of unhappiness about this populist program of the President.
12:32And other thing is about the corruption eradication movement that the President has been mentioning.
12:40So, we want to see the strengthening of the institutions that deal with corruption and we want to see the
12:49investigation continue.
12:51Regardless, these people are politically connected or not.
12:56The public wants to see the seriousness of the government,
12:59whether the government really wants to seriously investigate those who are involved in the corruption,
13:07even though they are close to the political parties, the current government.
13:12So, yeah, I think the demonstration today is a signal that the public is starting to lose patience
13:20and they lose their trust on the ability of the current administration to bring Indonesia to a better economic trajectory.
13:34Dr. Siwagi, help us to understand, because I just want to understand the whole situation,
13:37because in terms of looking at the freedom of the press in Indonesia,
13:42it's something that we are really look up to when it comes to comparing Malaysia to Indonesia.
13:47But we also have a new report, you know, from Tempo, for instance,
13:51being a cyber attack, 24.9 million cyber attacks after corruption report.
13:57There is only one thing, and we also have a few of our friends in Indonesia's media
14:02saying that there were some sort of gap orders being put to the media
14:08in terms of talking about rupiah's performance and also the, you know,
14:13other problem that is currently faced by Indonesia as a whole.
14:17How do you see the whole situation being managed in that sense?
14:22And how does that lead into the so-called challenge to the freedom of press in Indonesia
14:31in reporting the real issues and also getting to know the real problem on the ground
14:38for the administration as well?
14:40I think this is the thing that we really see kind of backward trends
14:49after the reformacy started in 1998.
14:52So we see that there's a trend that there's a repressions against freedom of speech
14:59and freedom of expression, and especially the interventions to the media
15:05to just reported the thing that support the government agenda or voices.
15:14But yeah, I think we see from today's demonstration, there's still room
15:20for the grassroots, especially from the academic and students to voice their concerns
15:31about the trajectory of Indonesia, democracy, political and economic trends.
15:41And yeah, I think we have to see how the government responds to this protest,
15:47whether the government will become more repressive,
15:50they will use the military and police to suppress the demonstrator,
15:57and whether they will co-opt these people, the leaders of the demonstrator,
16:03as to what they have done before.
16:06They co-opted the leaders of the demonstration to the government,
16:10so there will be no oppositions to the government policy,
16:15which is really detrimental to Indonesian democratic trajectory.
16:20So we do hope that the protests from the students today and for the upcoming days
16:29will open maybe the mind and the heart of the government
16:36that now the situation is very critical.
16:40They cannot just ignore the concerns from the people, the public.
16:45They just need to start thinking seriously about how to listen and fix the current crisis.
16:54All right.
16:55Dr. Suwagi, thank you so much for helping us to understand the whole situation,
16:59also the trajectory and moving forward in terms of this issue.
17:03It's not just about the rupiah, but the structural issues surrounding it.
17:06Dr. Suwagi, thank you so much again for joining Niagawan this morning.
17:10All right.
17:10Dr. Suwagi, thank you.
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