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The Indonesian currency revaluation: how not to profit from central banks


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The Indonesian currency revaluation: how not to profit from central banks

 
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Written by Andrew Henderson
 
Dateline: Jakarta, Indonesia

 

I wasn’t sure what to expect from Jakarta. Indonesia, which east-to-west spans about as much of the Indian Ocean as Australia, is an intriguing and even somewhat mysterious place. While China and Vietnam and Myanmar get all of the press from the financial media, Indonesia has been somewhat left alone.

Yet the story here is one of volatility. Inflation took a sharp left turn this summer, heading back up to levels approaching 9% after dropping down to levels below 4% a couple years ago.

And the Indonesian currency – the rupiah – is no different.

In the taxi from the airport yesterday, I made the mistake of examining a low-value banknote and exclaiming, “Who’s this dude?”, much to the consternation of the otherwise jovial driver.

Talking to a local today, I could quickly tell that the government has been selling the same story on the currency for years.

That story relates to the Indonesia rupiah revaluation. For years, the government has suggested that it would do something about the relatively volatile Indonesian currency. The rupiah, which crashed with just about every other foreign currency in the global financial crisis, then bounced back, tanked again, and so on.

And that’s just in a few years.

While the rupiah was touted as a success story a few years ago for breaking new ground against the dollar, it’s back in the doldrums now.

And as with several other fiat currency sob stories (like the one in Vietnam), the Indonesia rupiah is traded at insane levels.

For example, last night’s 27,000 rupiah street food meal (which was delicious, by the way, perhaps thanks to the cook smoking a cigarette while he made it) cost all of… $2.30.

Jakarta, Indonesia street food

Street food in Jakarta is dirt cheap. Decent meals can go for under $1, even in the shadows of the city’s exclusive shopping and business district.

As of today, 1 US dollar gets you 11,695 Indonesia rupiah at spot.

That hour-long cab ride? It cost about $4. A half-liter bottle of Coke? $0.40. Things are cheap here, and the poorly managed currency doesn’t help matters. Economic growth here is a ticking time bomb… more on that in a moment.

However, like those nearby countries which share such abysmal exchange rates, Indonesia’s solution to the problem is more sleight of hand.

Their answer to a worthless currency is to merely cut off three zeroes from the end. Instead of needing a 25,000 Indonesia rupiah to gorge on a Big Mac, you’ll only need 25.

How much easier could it be?

Well, for one thing, the brain trust at Indonesia’s central bank – Bank Indonesia – might be a little too wrapped up in their intellectual bubble in Jakarta. In their effort to fit in better in the forthcoming ASEAN economic community, they’ve decided to push forward with the long-awaited 2013 deadline for changing the currency over.

Only thing is, they haven’t done a very good job selling it to the people.

Jakarta Indonesia currency

Outside the capital city of Jakarta, Indonesians aren’t so sure about the central bank’s currency revaluation plans for the rupiah

Most people are surprised to learn that Indonesia is home to a quarter of a billion people, making it the fourth most populous country on the world’s most populous continent. However, only ten million of those people live in the capital city of Jakarta.

And many farmers and other rural residents still don’t entirely understand how this change will affect them. There have been reports that some are even frantically running around trying to find ways to stop their money from losing so much value. They’re terrified that their own government is going to wipe them out.

While their position may come from a simple misunderstanding, you can’t exactly blame them. Indonesia’s exchange rate is less than half what it was when the country gained independence in 1949.

The central bank governor didn’t make things better when he said: “We have to do a socialization when the economy is in good condition so that citizens will more easily accept the changes”.

Basically, scare your people half to death and screw them when times are good in order to minimize political blowback. Lovely.

The finance minister is on the record as saying that, while banknotes won’t be changed right away, the education process for the change will likely take up to ten years to sink in around the developing country. What many outside the western world don’t understand is just how developing parts of countries in this region are. It’s not as simple as putting a message out on the evening news and alerting the whole country.

And the bankers here should know that.

It’s not, however, like this hasn’t happened before. The Indonesian currency has already been revalued twice, both decades ago. If it weren’t for those currency revaluations, the rupiah would be denominated 1,000 times higher than where it is today. This in a country where rupiah-denominated banking assets already stretch into the quadrillions.

Meanwhile, Indonesia is currency an $8.4 billion current account deficit (that’s US dollars, not rupiah), and Bank Indonesia hiked interest rates nearly two full percentage points recently.

The reason Bank Indonesia did that is simple: they’re desperate to prop up their Indonesian currency. While experts suggested rate hikes of fifty basis points might have been worthwhile, the central bank’s plan to cover their tracks will almost undoubtedly cause problems for the Indonesian economy down the road.

But who needs economic growth or jobs when you’ve got a flailing fiat currency to save?

For one thing, investors aren’t amused. Indonesian ETFs have come to a screeching halt on fears of just how desperate the government is.

The situation in Indonesia only goes to prove a point: the government will do whatever it can to keep its own party going, no matter how much pain that inflicts on the population. Here in Jakarta, the bankers are willing to through their own frail emerging nation – and their citizens’ jobs – under the bus for their own benefit.

And when their own citizens think they’ll go bankrupt because the runaway currency has to have a few zeroes chopped off – all to make things look better to the international community – that’s just icing on the cake.

I saw a post on Facebook the other day that showed a US dollar bill and said: “This is worth something because you believe it’s worth something”.

Unfortunately for Indonesia, the government here doesn’t get to run world economic policy by virtue of having the world’s reserve currency. With no Federal Reserve to play smoke and mirrors here, currency manipulation actually hurts.

(“Threats” of the Fed tapering its QE are partly to blame for the rupiah’s near-20% drop this year.)

I do believe that the largely managed currencies of Asia have some growth potential based on a regional play with further growth in the Chinese yuan. As increased consumption in China leads to reduced dollar reserves and more yuan invested abroad, Chinese officials will have more motivation to ease up on their artificially low currency.

History has shown that gains in the yuan are capable of reverberating throughout the region. However, the Indonesia rupiah is plagued with issues and not a currency I’d be adding to my basket for any reason.

Despite its atrocious traffic, Jakarta is a nicer and more green city than I imagined. However, it also serves as a lesson not to trust the fiat currency masters. I’m all for making trading currencies to take advantage of certain imbalances, but there are some currencies I wouldn’t touch.

Unfortunately for Americans, they don’t realize that their government has a unique ability to prop up its debt-ridden, fundamentally declining currency. Indonesia doesn’t have that ability, and the penalties for its central bank toying with rates and wreaking havoc will ultimately effect the country’s ability to grow.

Imagine what will happen when the bloom falls off the US rose…

Andrew Henderson
 
Andrew Henderson is the world's most sought-after consultant on international tax planning, investment immigration, and global citizenship. He has personally lived this lifestyle for over a decade, and now works with seven- and eight-figure entrepreneurs and investors who want to "go where they're treated best".

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Rupiah Redenomination

 

A developed country tends to be identified with a strong and stable currency exchange rate. The United States through the Office of the US Trade Representative (USTR) at the World Trade Organization or WTO has removed Indonesia from the list of developing countries since February 2020. Thus, Indonesia has the title of being a developed country. Being removed from the list of developing countries of course has several consequences that must be faced by Indonesia. The impact of this policy will affect different and special treatment in terms of trade, namely the minimum threshold (de minimis threshold) for subsidy so that an anti-subsidy investigation can be stopped. The minimum threshold will be smaller. (Kompas.com 22/02/2020).

In addition, Indonesia will lose a lot of import facilities for a developing country. One of them is the loss of the Generalized System of Preference (GSP) or duty-free treatment to goods imported into the United States.

Another impact is on the Rupiah as a result of export-import trade transactions.

 

So, has the Rupiah been strong enough to compete internationally?

The government through the Ministry of Finance has issued Regulation of the Minister of Finance of the Republic of Indonesia Number 77/Pmk.01/2020 concerning the Strategic Plan of the Ministry of Finance for 2020-2024 (“Regulation 77/2020”). Regulation 77/2020 has a vision for the Ministry of Finance to become the Manager of State Finance to Realize a Productive, Competitive, Inclusive and Just Indonesian Economy. In order to achieve this main vision, the Ministry of Finance has proposed 19 (nineteen) Bills to be enacted into the 2020-2024 Mid-Term National Legislation Program and one of the bills that is currently being discussed is the Rupiah Redenomination ("Redenomination Bill").

 

Although it is still not certain that there will be a Rupiah redenomination, there have been cons against this government policy that will be executed by Bank Indonesia as the executor of this monetary policy. But there are also people who support this one thousand to one rupiah policy. According to Government calculations through Regulation 77/2020, this redenomination will provide economic efficiency in the form of accelerating transaction times. In addition, redenomination also creates efficiency in the quotation of prices for goods and services due to the simple number of digits in Rupiah. Simplification of the transaction and accounting system as well as Rupiah reporting because there are not many digits in the currency is also a justification reason for this redenomination plan.  As another view from us as a law firm that upholds clean law enforcement, we are of the opinion that through this golden opportunity the government can trace Rupiah from corruption which is very difficult to trace. As the old currency is no longer valid, all Indonesian citizens will sooner or later exchange them for the latest currency if this redenomination occurs.

 

Although the objective of this policy looks quite convincing and promising, simplifying the value of a currency to be smaller will allow rounding up. For example, a transaction value of Rp. 15,682. If there is redenomination, the value will be Rp. 15.682. Next, there will be a rounding up from Rp. 15.682 to Rp. 15.70. It cannot be denied that the value of Rp. 15.70 can be rounded up to Rp. 16. With more frequent rounding up, it is likely that the prices of goods in all transactions will also increase. This can encourage inflation in Indonesia. For goods we should be able to buy for Rp. 15,682, we have to buy at Rp. 16. The same thing was also expressed by an associate at INDEF (Institute for Development of Economics and Finance), Bhima Yudhistira in an interview with Kompas TV who said that the prices of goods on the market would increase due to rounding up.

 

Ideally, a law created in Indonesia should not only provide legal certainty, but also provide justice and legal benefits and must also be upheld for all Indonesian citizens, as stated by Sudikno Mertokusumo. If this Redenomination Law is enacted, hopefully this law can provide fresh air to various sectors in Indonesia and not cause further social inequality. In addition, another concern is regarding the frequent overlapping of regulations in Indonesia which have a quite crucial impact and provide obstacles in acting and making decisions for business interests. Hopefully this will not happen if the Redenomination Law is enacted. Often the regulations issued by the government are rushed, causing the transition from one regulation to another to go awry. In the current situation, Indonesia needs an regulatory instrument that can generate and accelerate economic growth as a result of the impact of the unfinished Covid-19 pandemic. If the regulation regarding the Rupiah redenomination is enforced, the government should really consider carefully by conducting in-depth academic studies first. With the existence of redenomination, we believe that the government needs a large budget because there will be changes to the national transaction system, which includes the government and the private sector. It would be wiser if the Government could use this budget allocation for the acceleration and growth of the Indonesian economy as well as the maximum handling of the Covid-19 pandemic. INDEF Senior Researcher Enny Sri Hartati expressed the same concern. She explained that strategic policies must be issued in normal and stable conditions to minimize risks to the economy.

 

With the condition of the nation which is currently focused on facing the Covid-19 pandemic, hopefully any discussion of regulations that can have a big impact on the country's economy should be postponed for the time being, because this nation must first focus and prioritize on the safety and health of its citizens as a result of the Covid-19 pandemic.

 

Harri Budiman

Edbert Nugraha Aji Budiwiyono

 

link :http://franswinarta.com/news/rupiah-redenomination/

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  • yota691 changed the title to The Indonesian currency revaluation: how not to profit from central banks

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