Opportunity after The Fed delays phasing out stimulus

Indonesia should capitalize on the opportunities brought on by decision of US central bank (The Federal Reserve/The Fed) to delay cut in its monetary stimulus.

The Fed recently ended long speculation on its quantitative easing with an announcement it would maintain the stimulus. 

The majority of the markets including the Indonesian Stock Exchange were bullish following the announcement.

The index of the Indonesian Stock Exchange surged and rupiah regained some of its losses after being on the decline for several months.

Deputy chairman of the Commission XI of the House of Representatives Harry Azhar Azis said the decision of the Fed could result in the return of foreign capital to Indonesia.

"The decision of the Fed to maintain funneling US$85 billion per month to the market could drive inflow of foreign capital into Indonesia," Harry Azhar Azis said.

Indonesia, therefore, should take necessary preparation by offering yields and strategy that the funds would not be easily leave the country any time, Harry said.

He then referred to the foreign exchange regulation or the Law No 24 of 1999 which is still effective until now. 

He described the law as being too liberal unlike the regulatory measure adopted by Thailand.

"We could follow the example from Thailand, which is effective in bringing home export earning through strict implementation of foreign exchange law," he said. 

The Thai foreign exchange law requires export earning to be placed in local banks for a certain period, called holding period, he said. 

Currently , Bank Indonesia has a regulation called Bank Indonesia Regulation (PBI) No.13/20/PBI/2011 and a Letter of the Bank Indonesia (BI)Governor No.14/3/GBI/SDM issued on the 30th of October 2012 that require withdrawal of foreign exchange earning from the exports of minerals, oil and gas parked abroad to be placed in the country in 90 days at the latest after the report of goods export (PEB).

Unfortunately PBI is no more than recording system and it has no legal basis to be effective as a regulatory instrument, he said. 

A strong regulation would be needed to force naughty exporters to put their money in the country under a certain holding period, he said. 

Harry also asked the government to immediately redress economic fundamentals mainly by pressing down imports while increasing exports. 

"First and foremost dependence on imports for oil and gas should be reduced by giving priority to development of oil refineries," he said. 

In addition, in short term and logically possible is encouraging expansion of creative and tourism industry, which involves large money circulation, he said. 

Indonesia Bond Pricing Agency said that foreign investors would not withdraw their entire funds at once from Indonesia even if The Fed would finally reduce its monetary stimulus.

"They would calculate the benefits and losses before deciding to withdraw their fund from the country," Wahyu Trenggono, a director of IBPA said here earlier this month. 

However, he said the government should have precautionary measures such as bond stabilization framework.

Chief Economics Minister Hatta Rajasa has said the government had been ready with anticipatory measures to face any possibility. 

"We could not tell other countries what they should do. What is important is whatever the decision of The Fed we have to be ready and the government will be prepared to face any possibility," Hatta said 

Bank Indonesia Governor Agus Martowardojo indicated Indonesian economy need to be always sufficiently resilient and capable of withstanding impact of possible adverse decision taken by The Fed. 

"We appreciate the decision made by The Fed to maintain its monetary stimulus, but Indonesia and other countries in the world especially emerging economies also have to be prepared when later The Fed would reduce the stimulus," Agus said. 

He said The Fed would some time in the future would phase out the stimulus . 

Therefore, the financial super body Financial Service Authority (OJK) asks Indonesian financial market players to be ready any time The Fed would cut its monetary stimulus .

"Sooner or later the stimulus would taper, therefore it is important for us to be always ready," OJK chief commissioner Muliaman Darmansyah Hadad said here on Sunday. 

World Bank Executive Director Sri Mulyani Indrawati cautioned that the decision of The Fed to maintain the stimulus would also carry risk and uncertainties. 

"This is the time when the policy makers have to properly utilize the momentum and to reduce domestic vulnerability to external factors," Sri Mulyani Indrawati, former Indonesian finance minister, said at a meeting of finance ministers of Asia Pacific Economic Forum in Bali last weekend. 

Chairman of The Fed Ben Bernanke did not rule out the US central bank would decide to cut the stimulus program this year. 

"There is no permanent calendar," Bernanke told reporters at a press conference after a two day meeting of the Federal Open Market Committee (FOMC).

Source: ANTARA