ECONOMIC UPDATE

AND CHALLENGES
MUHAMMAD EDHIE PURNAWAN, PhD
FEB UGM / Badan Supervisi Bank Indonesia

INTERNATIONAL CONFERENCE ON CENTRAL BANK FINANCE

Jakarta, Hotel Indonesia Kempinski, 27-28 of August 2018
WORLD GROWTH

2
CHINA IS STILL GOOD

3
3
INDONESIA IS QUITE GOOD

4
4
THE US ECONOMY IS STRONG, BUT…

5
5
TRADE WAR !!
President Trump
Why isn’t the EU and Canada informing the
public that for years they have used massive
trade tariffs & non-monetary trade barriers
agaist the US.

Totally unfair to our farmers, workers, &

companies!

Everybody’s talking! Remember, we are the

“piggy bank” that’s being robbed. All will be
great! Take down your tariffs and barriers or we
will more than match you!
6
 US RECENT TARIFFS

§ BATTLE 1: SOLAR PANEL AND WASHING MACHINES

§ BATTLE 2: STEEL & ALUMINUM AS NATIONAL SECURITY

THREATS

§ BATTLE 3: UNFAIR TRADE PRACTICES FOR TECHNOLOGY, &

INTELLECTUAL PROPERTY

§ BATTLE 4: AUTOS AS NATIONAL SECURITY THREAT

Source: Chad P. Bown and Melina Kolb, Peterson Institute for International Economics August 15, 2018 7
 https://www.politico.eu

TRUMP & JUNCKER: While EU import duties for cars are heavier than those
of US, for other products (such as trucks), EU say cutting duties for cars could
only be part of a broader trade deal.
88
 https://www.thestar.com/

TRUMP & TRUDEAU: Trump’s anger with Trudeau has been for some
time. In February 2018, Trump complained that Canada was “very
smooth” on trade. Trump was conveying his frustration that Members
of Congress and state governors were quoting Canadian arguments and
trade data back to him. https://www.thestar.com/ 99
 https://www.businessinsider.sg/

TRUMP & XI JINPING: Trump appears to be committed to the trade war

with China for the long haul, so it is unclear how much progress could be
made, although Chinese officials are in DC for negations with the Trump
administration concerning the countries’ trade war. https://www.businessinsider.sg/ 10
10
 XI JINPING
"We hope, developed countries will stop
imposing restrictions on normal and
reasonable trade of high-tech products
and relax export controls on such trade
with China. We must refrain from
seeking dominance and reject the zero-
sum game. We must refrain from
'beggar thy neighbor' and reject power
politics or hegemony while the strong
bully the weak."

JAMIE DIMON
(CEO at JPMorgan Chase)
“I am a little worried it could create
negative outcomes. I think it could offset
some of the benefits.” 11
TRUMP & JOKOWI: The policy response from the side of Indonesia is to diversify
the non-conventional export destinations, especially to the potential countries of
higher importation from Indonesia, anti-dumping policy, scrutinize the trade
12
12
agreements to partner countries and negotiate to sustain on the GSP. http://nasional.kontan.co.id
Indonesia Bilateral Balance of Trade

Source: CEIC

13
Tariffs Faced by Exports in Case of a Full Trade War

Calculated under the assumption that all countries will engage in a

trade war and set tariffs to their optimal mercantilist levels. Source: UNCTAD

14
OIL MARKET

15
 Geopolitics

• Since the Second World War there have been several military
conflicts around the world that have been associated with
significant changes in the price of oil (Monge et al., 2017).
• Rising instability in Middle East: Yemen, Libya, Nigeria à
increasing fear premium.
• The end of Iranian Nuclear Accord cuts roughly 1 million
bpd to the oil market.
• As Venezuela is failing, its oil production fell to around 1,5
million bpd; US ‘debt sanctions’ against Venezuela.
Source: CNBC

16
Europe Brent and WTI Spot Price (FOB)

90

80
Brent
70
74,25 USD
60
(Jul 18)
Dollars per Barrel

50

40

30

20 48,48 USD
10 (Jul 17)
0
Jul-17 Aug 17 Sep-17 Oct 17 Nov 17 Dec 17 Jan-18 Feb-18 Mar-18 Apr-18 May 18 Jun-18 Jul-18 But lower, after the
Brent WTI
Trump phoning

Source: US Energy Information Administration

17
 Million USD (FOB)

0
500
1000
1500
2000
2500
Ja 3000
n-
1 6
M
ar
-1
M 6

Source: Bank Indonesia

ay
-1
6
Ju
l-1
6
Se
p-
16
N
Oil and Gas Import

ov
-1
6
Ja
n-
17
M
ar
-1
M 7
ay
-1
7
Ju
l-1
7
Se
p-
17
N
ov
-1
7
Ja
n-
18
M
ar
-1
M 8
ay
-1
8
(Jan 17)

(May 18)
USD 2,6B
USD 1,9B

18
 FFR
INDEPENDENT

Trump expresses concern about monetary policy,

that is interest rate increases by the Fed. He was “not thrilled” with Powell.
Jerome Powell: “We do our work in a strictly non-political way,
based on detailed analysis, which we put on the record transparently.”
19
Effective FFR

20
20
 BI 7DRR (%)

0
1
2
3
4
5
6
19
-Ja
n-
17
16
-F
eb
-1
16 7
-M
ar
-1
20 7
-A
pr
-1
18 7

Source: Bank Indonesia

M
ay
17
15
-Ju
n-
17
20
-Ju
l-1
22 7
Au
g1
22 7
-S
ep
-1
7
19
Oc
t1
16 7
No
v1
14 7
De
c1
7
18
-Ja
n-
18
15
-F
eb
-1
22 8
-M
ar
-1
19 8
-A
pr
-1
17 8
M
ay
18
30
M
Bank Indonesia’s Response : BI 7DRR

ay
18
29
-Ju
n-
18
19
-Ju
l-1
15 8
Au
g1
8
5,5 %

4,25 %
(Jan 18)
(Aug 18)

21
Indonesia’s International Reserves

The Indonesia
International Reserves at
the end of July 2018Outflows:
was
recorded at USD118.31
USD 1,3B
billion. It is lower than
June 2018 of USD 119.8(ay 18)
billion.
USD 889M
The decline in Indonesia
(June
international reserves was18)
mainly influenced by
government external debt
payments and the
stabilization of Rupiah.

Source: CEIC (2018)

22
Indonesia’s External Debt

Indonesia’s external debt

grew at 6.8% (yoy),
Outflows:
slower than previous
month’s growthUSD of 7.8%
1,3B
(yoy).
(ay 18)
Indonesia’s external debt
USDof889M
position at the end
May 2018 amounted(Juneto18)
USD358,6 billion.
Bank Indonesia and
Government continues to
optimize the external
debt’s role.

Source: CEIC (2018)

23
 TURKEY CRISIS
“My belief is: interest rates are
the mother and father of all evil.”

"We will boycott US electronic goods. If

they (the United States) have the iPhone,
there's Samsung on the other side. We
(also) have our Venus and Vestel,“

Erdogan doubled the tariffs on cars to

120 per cent, on alcohols to 140 per cent
and on leaf tobacco to 60 per cent.
24
25
Lack of monetary policy independence

Outflows:
USD 1,3B
Products Aluminium
(ay 18)
Escalating feud with US boycott; cars
tariff 120%;
tariff 20%; USD 889M
steel 50%
alcohol 140% (June 18)

Geopolitical uncertainty on military

invasion to Suriah (by US and Russia)

26
 Turkish financial crisis due to:

Large, persistent Current Account deficit

Outflows:
USD 1,3B
(ay 18)
USD 889M
Unsustainable populist economic policies (June 18)

Foreign investor dependency (external debt)

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Collapsing Turkish Lira

37%
in 2018

28
(TRY, IDR) / USD

Source: Yahoo Finance

29
(IDR, MYR, PHP, AUD, THB) / USD

Source: Yahoo Finance

30
 Why is it important?

Outflows:
USD 1,3B
(ay 18)
USD 889M
(June 18)

Turkish financial crisis

Rising capital flight (“flight to quality”)

Investors are losing confidence in EME’s

performance
Spreading currency crisis
31
Chancellor of Germany - Angela Merkel
Nobody has an interest in the economic
destabilization in Turkey but everything must
be done to ensure an independent central bank.
Germany would like to see an economically
prosperous Turkey.

This is in our interest.

Bundesbank/BIS - Jens Weidmann

It is much more difficult to calculate the
indirect impact, for example a general
loss of trust that also affects other
emerging economies.
32
CAD: Minister of Finance
MOF - Sri Mulyani Indrawati
Current Account Deficit has became a
concern, therefore the government will
take actions to increase exports and
reduce imports.

She plans to increase taxes on 900 imported

items.

The government plans to control

imports of consumer goods by
evaluating income tax on importation.
This is a decision to control the current
account deficit in 2018:Q2 which has
reach 3% of GDP. 33
CAD: Governor of Bank Indonesia

GBI - Perry Warjiyo

The deficit is said to be safe if the

percentage is still below 3% of GDP.
In the future, the performance of the
Indonesian BOP is predicted to
remain good, with a CAD within the
safe limit and can sustain external
sector resilience.
But, there is global upheaval such as
a trade war this year.

3434
 CAD BI 7DRR IDR / USD

3.04% of GDP 5.5% Rp 13,756

Q2 2018 15 Aug 2018 29 Mar 2018
($8b)

2.21% of GDP 4.25% Rp 14,572

Q1 2018 22 Mar 2018 23 Aug 2018
($5.7b)

35
 Balance of Payment
Current Account Net Error & Omissions
Capital and Financial Account Balance of Payment

USD Mn
15

10

-5

-10
2017:Q1 2017:Q2 2017:Q3 2017:Q4 2018:Q1 2018:Q2 Source: CEIC

36
 Balance of Trade
Export Import
Q4 2017
35 35
+3,05
30 30

25 25

Import Value (USD bn)

Export Value (USD bn)

20 20
Q2 2018
15 15
+0,28
10 (Mn USD) 10

5 5

0 0
Agricultural Manufacture Mining products Others Consumption Raw materials Capital goods Others
products products goods and aux. Goods
Q4 17 Q1 18 Q2 18 Q4 17 Q1 18 Q2 18

Source: Q4 2017 : 8,9% Q4 2017 : 11,8%

Oil & gas Oil & gas
Bank Indonesia Q2 2018 : 9,5% Q2 2018 : 11,6%
37
 Current Account Balance
Goods Services Primary Income Secondary Income Current Account

USD bn
8
6
4
1,63
2
0,29
0
-1,79
-2
-4
-6
-8 -8,028376194
-10
-8,15
-12
2017:Q1 2017:Q2 2017:Q3 2017:Q4 2018:Q1 2018:Q2 Source: CEIC

38
Krugman , et al. on CAD (2017)

An excessive imbalance in the

current account—either a surplus or
a deficit—may have undesirable
long-run effects on national welfare.
Large external imbalances may also
generate political pressures for
governments to impose restrictions
on trade.

A large current account deficit can

undermine foreign investors’
Paul Robin Krugman confidence and contribute to a
Princeton University sudden stop.

39
Thank You
In a way to protect the domestic
currency, all countries optimise their
policy instruments —that is many
nations now doing trade war,
monetary policy war, and currency
war.

But the one that is almost forgotten

as an augmentation of structural
reform is that of the sophistication in
the science of market sentiments.
edhiepurnawan@ugm.ac.id Hence, it is time to learn more on
0815-796-0682 behavioral monetary economics and
policy.
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