The United States Federal Reserve’s decision on Wednesday to defer a reduction in economic stimulus offers Indonesia breathing space but does not remove the necessity for prompt action by policy makers here, said the vice president, Boediono, who goes by one name.
He called for the country to adjust its targets for inflation, the exchange rate and trade deficits, while also removing administrative obstacles to infrastructure programs and expanding online education.
“We have been addicted, so to speak, with an easy money environment for four years,” Mr. Boediono said. “We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer” available.
Emerging markets around the world have seen an exodus of investment, falling currencies and tumbling stock markets since May. That was when the Fed began signaling that it was preparing to start cutting back its purchases of Treasury bonds and mortgage-backed securities — purchases that had helped keep long-term interest rates low to foster an economic recovery at home.
Indonesia and India were the two countries in Asia hit hardest as long-term interest rates rose through the summer in the United States and investors shifted money there. Both Asian countries’ financial markets staged a partial rebound on Thursday, however, after the Fed’s decision not to begin now the curtailing of asset purchases.
The Indonesian rupiah has fallen 13.7 percent since the start of May, making imported cars, cameras and many other goods more expensive, and threatening to feed inflation. The rupiah’s fall has also driven up the cost of government fuel subsidies.
The Indonesian central bank raised short-term interest rates by a quarter percent on Sept. 12, a move that temporarily halted the rupiah’s drop but could further slow economic growth.
While avoiding any specifics, Mr. Boediono appeared to hint that he did not expect recent market shifts to be reversed quickly. He said that Indonesia had to adjust “interest rates, even our exchange rate, to a new normal.”
Given a choice of reaccelerating economic growth or seeking greater stability in inflation, the value of the rupiah and the trade deficit, Mr. Boediono said that stability had become a higher goal in recent months.
But he called for a series of supply-side measures to address bottlenecks in the economy that could otherwise contribute to inflation. These measures included easier land acquisition and permits for infrastructure projects, as well as a new system of online education that would span Indonesia’s huge archipelago, which is as far across as from Seattle to Tampa, Florida, or from Paris to Tehran.
“Work hard on the supply side, then you can achieve a safe level of inflation without having to really tighten your monetary policy with the costs to growth and so on,” he said.
Many have long blamed corruption as another factor holding back economic growth in Indonesia, and the country has seen an accelerating tempo of corruption prosecutions in the past several years. Mr. Boediono said that it was impossible to know whether overall corruption had increased or declined, but said that the spate of legal cases showed that dishonest officials had more to fear.
Some of the most sought-after jobs in the Indonesian government used to be as project managers, because of the graft opportunities they provided. But Mr. Boediono said this was changing as corruption investigations were stepped up.
President Xi Jinping of China is scheduled to visit Jakarta this coming week. President Susilo Bambang Yudhoyono of Indonesia will hold discussions with him on some issues, including the South China Sea, Mr. Boediono said, declining to elaborate. China has been increasingly assertive in the past couple of years about claiming most of the sea as its own, to the annoyance of Indonesia’s allies in the Association of Southeast Asian Nations, particularly Vietnam, the Philippines and Malaysia.
Mr. Boediono said that he would be discussing with Mr. Xi the possibility of expanding the bilateral currency swap agreement between Indonesia and China, but he said that the amount of the expansion had not yet been decided. An expanded agreement would allow Indonesia to borrow more dollars from China if needed to buy rupiah in currency markets someday during another period of exchange rate volatility.
Mr. Boediono rarely grants interviews, and the one on Friday was the first time that he had discussed his country’s economic policies with an international media organization since the Fed began signaling in May that it planned to reduce its bond-buying program.
Mr. Boediono, 70, has been the central architect of Indonesia’s steady economic growth since the Asian financial crisis in 1997 and 1998. He negotiated the country’s International Monetary Fund bailout then and went on to serve as planning and development minister, finance minister, economics minister, governor of the central bank and, since 2009, as the vice president.
He was elected vice president in the summer of 2009 when Mr. Yudhoyono won a second term. Legislative elections are scheduled for next April and presidential elections for next July; Mr. Yudhoyono is not running for a third five-year term because of term limits.
As a technocrat with little if any political base, Mr. Boediono has not been expected to run for president. He said on Friday that he had no desire for public office after his term ends in October next year, and that he hoped to return to academia and focus on online education thereafter.
He has a doctorate in business economics from the Wharton School at the University of Pennsylvania and has been on the economics faculty at Gadjah Mada University in Indonesia since 1973.
As governor of the central bank during the global financial crisis, he pivoted from a fight against inflation in the summer of 2008 to a rapid program of economic stimulus by December of that year in a successful bid to prevent the economy from falling into recession then.
Article source: http://www.nytimes.com/2013/09/21/business/global/indonesia-needs-to-wean-itself-from-easy-money-leader-says.html?partner=rss&emc=rss