Jakarta, CNBC Indonesia – Senior economist and former finance minister Chatib Basri revealed two specters that are of concern to policy makers in the country. These two specters are more worrying than the hawkish stance of the Federal Reserve (The Fed).
First, the trend of increasing interest yields on long-term United States government debt securities is starting to rise.
“This increase in bond yield actually occurred because of the perception in the market that the risk of a recession in America was decreasing. In fact, the American economy is strong. Because the American economy is strong, they then started to consolidate the balance sheet,” said Chatib to CNBC Indonesia, quoted Tuesday (24/10/2023).
The increase in long-tenor US Treasury yields, competing with short-term tenors, has meant that capital flows from developing countries continue to enter the United States (US).
This condition is exacerbated by the potential for inflation to continue to rise in the future due to the new impact of the war in the Middle East between Hamas and Israel which has caused the price of oil or energy commodities to rise.
Therefore, according to him, the current volatility in the rupiah exchange rate is so great that Bank Indonesia has had to adopt a policy of increasing the benchmark interest rate by 25 basis points (bps) to 6% from the previous eight months at 5.75%. The reason is none other than to prevent the difference in interest rates from being too small with the US, so that capital flows do not continue to flow out.
Second, the prolonged impact of the El Nino phenomenon, or extreme drought and heat that has hit many countries, including Indonesia.
This problem influences the supply of food commodities to become increasingly difficult to obtain because the production of main food commodities such as rice is also difficult to obtain. So, when the rupiah exchange rate continues to weaken and rice supplies must be met with imports, it will put pressure on the trade balance and current transactions amidst high crude oil commodity prices.
“So there are quite a lot of complications regarding this, why? Because this also coincides with El Nino, where the price of rice rises and several countries start to limit exports. So it is very important to be secure regarding rice. If the rupiah weakens, the price of rice imports “It’s also expensive,” said Chatib.
In the same vein, Permata Bank Chief Economist Josua Pardede emphasized that the reversal of direction in BI policy amidst controlled inflation was indeed caused by the emergence of the term premia phenomenon, due to the high demand for US debt and causing foreign capital to flow in droves to the US.
“The increase in global bond yields is not only occurring in short-term bonds, but currently long-term bond yields are also experiencing an increase or Treasury Term Premia, because government debt in developed countries tends to increase,” said Josua.
“Capital flows to developing countries are also hampered and funds tend to move to developed countries (cash is the king),” he stressed.
This condition also affects banking performance. The growth of third party funds (DPK) slowed to 6.54% on an annual basis as of September 2023 from the previous month’s 6.62% yoy. Then credit distribution only grew 8.96% from the previous 9.04%.
“Non-performing loans as of August 2023 were recorded at 2.50% (gross) and 0.79% (net). BI still projects credit growth in 2023 will be in the range of 9-11%,” emphasized Josua.
Meanwhile, regarding El Nino, Josua once revealed that the impact of El Nino had not been felt this year. Until last August, he said, inflation due to food prices was still relatively under control. He predicts that inflation could possibly be below 3% by the end of the year.
Josua assessed that, based on the study he conducted, the peak of El Nino was only felt 6 to 9 months after the peak of El Nino occurred. This means that the impact of El Nino that occurs at the end of this year will likely have an impact on inflation that occurs in mid-2024.
“Here there is a lag time to adjust the El Nino peak time to food inflation itself,” said Josua.
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