Indonesia's Current Economic Developments

Based on data from Bank Indonesia (BI), on March 14, 2015, Rupiah closed at the position of Rp13,191 per US Dollar, and this is the lowest level for the Indonesian currency towards the US Dollar since.. well.. the financial crisis in 1998. So although in the past two years I was trying to ignore the macro-economic developments in the country in order to be focus on the company's fundamentals in investing in the stock market, but this remains an issue, because even in 2008, at the peak of global crisis, the exchange rate of Rupiah had never drops to as low as today. Back to 2008, Rupiah only dropped to Rp12,768 per US Dollar as its lowest point, before then immediately return to the normal level of Rp9,000’s per US Dollar.

Interestingly, we know that in 1998 and 2008, Indonesia was hit by the economic crisis, and the stock exchange at these times was also falling apart. But today, although the Rupiah seems alarming but the general economic conditions seem to be running normally, even the Jakarta Composite Index (JCI) successfully breaking the new high in recent months. So, you may ask, is Indonesia in a state of crisis, normal and nothing’s wrong, or what?

In this case, I want to invite you to take a look back to the year of 2013, precisely on August 23, 2013, in which the Government of Indonesia launched the policy package of 'economic rescue', to address the impairment of Rupiah which traded at as low as Rp11,000 per USD. At the time, the condition of the stock market was completely different with the current condition where JCI slumped to 4,200’s, or tumbled more than 1,000 points from its peak position in May of the same year.

However, as it had already been discussed in this article, the real problems faced by Indonesia at the time (in 2013) were 1. The slowing economic growth, due to 2. The deficit in the import-export balance, caused by 3. Increase in the value of imports of industrial machineries and equipments due to the growth of manufacturing industries in the country, and 4. Decrease in the value of exports due to the decline in the price of coal, palm oil, and rubber, which are the three main export commodities of Indonesia. In 2013, Indonesia's economic growth was only 5.8%, down significantly from its peak ie 6.9% in 2011. So when the Rupiah impaired to Rp11,000 per USD, then it is a reflection of the economic slowdown earlier. In many countries, if there’s something wrong with the nation’s economy, the currency’s exchange rate towards US Dollar would decreased by itself.

Palm Oil and Coal, the Two Main Commodities of Indonesian Exports

And when the government launched a policy package regarding to economic rescue, then the purpose is that Indonesia's economic growth will increase, and eventually the exchange rate of Rupiah will increased by itself. Here were the four main policy packages of President SBY back in 2013:

1. Provision of tax reductions for labor-intensive industries that are able to export at least 30% of its products
2. The exports of mineral ores, which previously banned completely, are now allowed as long as the companies meet certain conditions.
3. Increasing the use of biodiesel in diesel fuel, which is expected to reduce imports of diesel fuel, and
4. Raising the taxes on imported luxury goods, from previously 75% to a maximum of 150%.

Based on the four points above, it is clear that the Government was trying to increase the exports (points 1 and 2), while at the same time reduce the imports (points 3 and 4), so that the trade deficit is expected to be eliminated. However, the above policy packages were still not reaching the main causes of the deficit, ie the decline in prices of CPO and coal, and the increase in imports of industrial machineries and equipments. And unfortunately the prices of CPO and coal are still not recovered even until today. As a result, based on the latest export and impor data from Central Bureau of Statistics, Indonesia had a deficit balance of exports and imports of US $ 1.9 billion in 2014. The bad news, economic growth rate also continued to fall until 5.0% YoY only in the third quarter of 2014. And if the trend continues, then the figure will probably dropped further in the next quarters.

So when Rupiah eventually dropped to Rp13,000 per USD, that’s not necessarily because the value of US Dollar is improved towards all currencies in every countries including Indonesia, but also because in fact our economy is indeed in trouble, where the trouble is not happened recently but since two or three years ago. Okay, we may still far from any crisis, but if the current condition is not improved then it is possible that the crisis will eventually happened.

The problem is, related to main causes earlier, the Government certainly can not control the price of commodities in the international market, and also can not just stop the import of industrial machines and equipments, because it would turn down the industry itself (so in this case we could not blame the government in 2013 only because their policies were not reached the main cause of the slowing economic growth, because maybe the policies were all they could). So the question now is, will the current government issue policies which, though it may also cannot directly reach the main causes of the problem, but can be more effective in promoting economic growth, and also can be quickly implemented? Such as:

1. Indonesia's largest exports after oil and gas, palm oil, and coal, are the exports of electric equipments, rubber, and machineries. So the government may provide certain incentives to the companies of of electric equipments and machineries, so that they can increase the volume of products and subsequently increase the value of exports.
2. Until to this very day, Indonesia's largest exports are oil and gas, whether it be in the form of crude oil, gas, or refined oil. However, the value of exports of oil and gas has been down in recent years, from US$ 41.5 billion in 2011, to only US$ 30.3 billion in 2014 (and the cause is not mere the drop in world oil prices, because the average price of oil in 2011 was US$ 104 per barrel, or only slightly higher than the average price in 2014 of US$ 96 per barrel). So in this case the Government through the ministries and affiliated agencies might encourage oil companies that operating in the country, both foreign and local, to increase the production.
3. Indonesia's largest imports are also oil and gas, only more in the form of refined oil (while our export is primarily in crude oil). And unfortunately, even though the value of oil and gas exports continue to fall in the last three years, but the value of oil and gas imports went up steadily in the same period. So even though this solution is difficult to be realized in the near future, but the Government should immediately start the construction of oil processing refineries in the country, so in the future we do not have to import gasoline and diesel anymore, or at least the import will reduced.
4. Provide incentives for oil palm plantation companies so that they would develop the downstream industry of palm oil, including developing biodiesel, so that Indonesia can export the downstream products of CPO with added value, and also reduce the import of diesel (Actually this is also will take a long time to be done. But if the implementation is not started from now, then what are we waiting for?)
5. Beyond the issue of trade deficit, also remember that the economic growth is not solely driven by rising exports and lower imports, but also driven by 1. The increase in government spending, 2. Consumption, and 3. Investments. Well, the government certainly has a lot of options to improve the three things, just pick the ones that could be implemented in the near future.

Aaaand so on.. Just a moment ago, probably after receiving pressure from the public related to the imparment of Rupiah, President Jokowi will announce a policy package of economic rescue in the near future. We'll see what the policies would be.

And what about the stock market? Does this means that the JCI will dropped, since, as already discussed above, our economy is currently in a small trouble? And if JCI is really dropped later, then it will drop to what position? (this question is often asked by fellow investors). Well, as a friend once said, the future is not ours to see. JCI can go up and down at any time, and if it dropped then it may drop to any positions. But all I could say for the moment is that the performance of thecompanies on the Stock Exchange is still pretty good so far, and the valuation of the JCI is still not too high (still lower than when the JCI reached 5,250 in May 2013), although not low also. So if foreign investors continue to come in like the last month, then the JCI could still rise because in term of valuation it is still have space to rise further, and also because there are positive sentiments of the releasing of the company's financial statements as well as dividend payments within the next one or two months.

The point is, although I saw that the stock market will eventually going down in a longer period of time to adjust with the national economic fundamentals, but for now the JCI is still have quite a lot of reasons to at least stay in its current position. Correct or not, we'll see.