If the stock market was “Kid-Zania”, then President Susilo Bambang Yudhoyono’s speech at the first day of trading on Monday was like a father laying out his financial plans so that the kids could continue playing grown-ups.
In so many words, Yudhoyono said the Indonesia Stock Exchange (IDX) owed much of its positive performance in 2011 to prudent fiscal and monetary policies formed under his stewardship.
The stock market ended a bumpy year on Dec. 30, 2011, with the Jakarta Composite Index (JCI) at 3,821.99, growing by a modest 3.2 percent compared to the previous year, making it nonetheless the third best performer globally in an era of great economic uncertainty.
In his keynote speech, Yudho-yono told stock traders that the country had to be prepared for another round of uncertainty as decision makers in the US and Europe were still struggling to avoid another recession.
A government-appointed think tank, the National Economic Committee (KEN), warned recently that crises in the developed world would weaken Indonesian exports, create foreign liquidity problems and hurt investment growth. The committee said Indonesia’s financial markets were poised to bear the brunt of high volatility.
Gloomy outlook aside, there was room for hope, Yudhoyono said, especially after Fitch Ratings had reinstated the status of Indonesian sovereign debt to investment-grade level. Yudhoyono said he would maximize efforts to cash in on the positive momentum.
Yudhoyono’s strategy for weathering the external turbulence is to maintain his style of economic leadership, which has been characterized by a conservative fiscal policy — meaning a low state budget deficit, high domestic consumption and double-digit export growth.
In the finalized 2012 state budget, the government predicted revenue of Rp 1,292.9 trillion with expected state spending of Rp 1,418.5 trillion; and a budget deficit of 1.5 percent of GDP. Yudhoyono said the 2011 budget deficit stood at 1.3 percent, well below the 2 percent target.
The Finance Ministry said that it hoped to maintain inflation at a maximum of 5.3 percent this year. The inflation rate stood at 3.79 percent in 2011.
“We have to maintain the fiscal policy, the debt to GDP ratio, inflation rate and the interest rate. When the government achieves such conditions, it is the economic actors’ time to step up,” the President said.
Yudhoyono may argue that the performance of the stock market should reflect the country’s economic fundamentals, which he has vowed to maintain.
However, analysts have long argued that the IDX suffers from a structural problem of having too much foreign funds in its investment pool, which makes it extremely vulnerable to external shocks.
Foreign funds traditionally control more than 60 percent of daily transactions in the stock market, which reached Rp 24.2 trillion by the end of last year.
Considering the large amount of so-called “hot” money, volatility in the Indonesian financial market directly translates into more pressure on the rupiah.
IDX president director Ito Warsito brushed off fears over the inability to increase the proportion of Indonesian investors, saying that it was an accepted characteristic of the Indonesian stock market.
He denied that more foreign investors would cause instability in the secondary market.
“An increase in the number of foreign investors is a logical consequence of Indonesia being of interest to global investors,” he said.
In his speech, Yudhoyono failed to address these concerns, which have the potential to destabilize the economy. KEN, the economic think tank that the President personally appointed, warned that Indonesia should reactivate the currency-swap agreement with China and Japan under the Chiang Mai Initiative in order quell this single-most detrimental force in the economy.
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