MI: Thank you for your time Mr Poltak. The readers would like to know what is actually happening with the economy of Indonesia? You monitor the movement in the stock market every day; is it because the economy of China is slowing down, the global economy is slowing down that it impacts on the economy of Indonesia?
PH: Actually speaking Indonesian economic problems is quite complex. To more broadly talk about the global economy is certainly more complex. And lately, this complexity is more unique. Because one country's economic condition can link to other countries' conditions. We should note that something occurred in the past few years. The economy of Indonesia has been slowing down since 2013. But the slowdown from the year of 2013 is still pin nine. Therefore if we take a look at Indonesia's economic growth curve, each quarter of 2013 already showed a slowdown, but there were some anomalies that bumped up as well. Then it went back down, but the pattern of the decline was already quite clear. When we are looking for what might be the cause, of course it depends on the components. One of the components that was most noticeable since 2013 was when we began suffer trade deficit. This contributed to the situation where the dependence on capital flows becomes greater as the economy was actually in the state of trade surplus. This means that the exchange rate is rising. But when it began to experience deficit this means lower but as far as the incoming investment portfolios - in the form of Foreign Direct Investment (FDI) or investment portfolios are still coming, the effects of the slowdown of the export performance would not be as bad. The obvious impact here is the misalignment between those two. And what happens is that a very substantive issue is being covered up, and it is about how the largest component of the Indonesian import problems is oil.
MI: And why oil imports could undermine Indonesia's trade balance? It is because the oil is subsidized?
PH: So actually what happens here is, if for example since 2013 there have been the awareness that subsidized oil could bring serious problems to the economy of Indonesia later in the day, it would not be as bad as the current situation today. However, such awareness did not rise because of political pressure where the previous government did not want to lose votes due to a policy to raise fuel prices, but if we remember in 2013 it was very clear that the Minister of Finance for example, had opened options, the subsidy was supposed to be limited but it was rejected also because it simply did not want to lose votes. Therefore, we could see that the decrease in our trade balance can be traced back to firstly how the imported oil was large and growing, and we know that many of those were smuggled. And this also came from government subsidies, in (the year of) 2014 the situation worsened as the earlier trade balance was not getting better, but we see here there was a further development that is quite interesting that approaching the end of 2014 suddenly oil price fell sharply. Instead of supporting the trade deficit, we held back because our largest exports are commodities. And the largest commodities traded in the world are oil and coffee. So those items in one basket, instead of getting better, we fell even deeper and it continues until now. And we see that the economy is sustained by the current portfolio, well it must now stand on its own feet. Because, of course, the world is experiencing an economic slowdown.
China definitely played a role. It is impossible not to. If we ask, where did this come from? Firstly, China is already growing fast for a long time and then on the other side China feel the strategies they use for this, which is the economy based on exports, can no longer be sustainable because this strategy mainly rely on one thing: how to make the Renmimbi or Yuan exchange rate low in order to remain competitive. Well, these are the consequences of their conduct on the exchange rate pegging. That is why with the economic growth and export growth yet the value of its currency remains the same. That is because it is deliberately do so. What are the consequences for this? Consequences of this are the Chinese central bank would not want to accumulate so much excess liquidity by buying bonds from United States, China's number one trading partner. Well, this is done continuously so that the Americans "enjoy" a state of low interest rates and economic growth is driven by such low interest rates. But we know it's not possible to constantly go on like that. Therefore the US government seems like printing money out of nothing to later be bought by China and stacked for too long.
China's fear was that US Dollars are spreading widely. Adverse circumstances could happen and that might cause an inflation in the United States. This is what China most feared about because it has (at the most) foreign exchange reserves of about 3.9 trillion dollars which is almost more than 90% in bonds. We know the reason behind why bonds will not get along with inflation. When inflation risen up to 10%, bond prices could fall by more than 10%. That way, it might be true that China was held hostage by the Americans. On the one hand, China cannot throw the currency to the market because they have a very high bonds and if they throw those to the market, the price is falling too deep that the bonds would experience the same thing. Because they mark to market against market prices. On the other hand, keeping the currency forced China to divert their export-based economy to consumption-based. It is then a big problem because being an export-based for many years, China has become the factory for the world because they produce not only for themselves, but for the whole world. They have been holding that post for so long. They also have a world-class capacity. Now, they might have to turn into consumption-based and does not rely on exports. Where will the excess of goods go? This is becoming a problem. Another problem with consumption-based economy is that it demands spreading information, understanding, and etc. You cannot build a healthy society based on consumption if the information does not spread well. Because people (consumers) need certainty about the quality of information they receive, the certainty of life, the certainty of the future and then the people could become comfortable doing consumption in the long term. Back to the long chain of issue, it is impossible to understand the Indonesian economy only from the perspective of Indonesian economy. There are many interconnected and related chains.
MI: Earlier you mentioned that oil price fell sharply (dropped). How is the projection for world’s oil price, and what would be the impact of world’s oil price that continues to be at a low level for our (economic) future? What would happen to the commodities boom? Have the super-cycle for commodities ended?
In the history of theoretical economic on the market, there is a cycle called kondratiev cycle. The cycle which is long enough, the length is about twenty years. Between ten to twenty years. Some argued that the kondrative cycle is happening now, where commodities have gone up continuously (bullish) for almost fifteen years or more than ten years. Now it is experiencing a correction. This cycle could be more or less run for the same length of time. Therefore, if you are asking whether the price decline is a part of the cycle, the answer is, it could be. But some of the cycles are symmetrical, some are asymmetrical. It seems that this cycle would be symmetrical. It could mean having low commodity prices in the long term. Especially for oil. In addition, China has largest market commodity yet now is lowering its economic growth rate, so it will not absorbs the same amount of oil supply. On the other hand, the other fragmented markets such as India, Indonesia, and Mexico have not been able to replace China as the main market for oil and so on. There are also new technological developments in the field of oil and gas industry, such as fracking technology. This technology is able to make the United States began to abandon its dependence on oil. Meanwhile, Saudi Arabia continues to flood the oil and gas market to hold oil prices up against the new technology in the United States. However, the oil price from Saudi Arabia is the most inexpensive therefore they could flood the oil market more freely.
MI: Then, people are worried about the weakening exchange rate to US Dollars from Rp 12,000 to Rp 14,000. Are we going to repeat the financial crisis in 1998, from the financial crisis to the real sector in which the rupiah depreciated sharply and spread out to the real sector?
PH: These concerns were exaggerated and misplaced. If we learn about financial economy, there is a concept of time value of money. That is what makes the difference between Rp 1,000 today and Rp 1,000 in the future. Do you think Rp 13,000 in 1998 is the same to how Rp 13,000 worth today? Of course it is different. Previously, Indonesia's per capita income was less than USD 1,000- measured by USD. Today, Indonesia's per capita income has reached USD 4,000. Therefore it is not appropriate to argue that we will repeat the previous financial crisis. Come on.. I mean put it back in the right place. On the other hand, the 1998 economic crisis was also triggered by our financial sector which was very much damaged at the time. However, today, our financial sector is healthier and has been improved. The whole world is also undergoing depreciation for example Malaysia, Brazil, and Russia. The phenomenon that is happening right now is indeed the super dollar phenomenon, which is the strengthening of dollar exchange rate.
MI: Looking back in 2009 there was the subprime mortgage crisis followed by economic slowdown in China and the world seemed to boom and boost faster in the world that is interconnected and interdependent today. What do you think the government can do about it? What should not the government do?
PH: Boom and boost simply started from the 1990s when the Japanese economy slowed down, Japanese banks should have also done a write-off on their loans, but they did not do that and they were forced to borrow elsewhere. Where is ‘elsewhere’? To Southeast Asia. The boom appeared in 1996 in Southeast Asian, in 1997 people began to realize there was something wrong about the misallocation of resources. The boost impacted on the crisis in Southeast Asia in 1997. Then as the money moved to Russia, another crisis occurred in 1998 which before this crisis, there was also a crisis in Mexico in 1995. It happened in 1998, 1997, 1998. Then in 2000, there was a crisis on LCTM (Long Term Credit Management) that shook the US market as well. As the 11 September 2001 tragedy happened, the economy weakened, and it was "injected" again by Greenspan (Central Bank Governor AS) with lower interest rates, along with China entering the WTO (World Trade Organization) in 2001 that made the international trade became more open.
From 2001 to 2008, the interest rate was too low that the loans were granted to people who were unable to afford them and the boost bubble burst and impacted throughout the world with Europe as the most heavily affected. And after that, the crisis in Greece emerged. Then today, the Chinese economy slows down. Therefore, the crisis cycle is not getting shorter and often occurs. But there are major crises in which there are small crises occur within it. The crisis from time to time never changed, it still occurs with different magnitudes.
From one crisis to the other, it makes us aware from liberal point of view that interventions by governments have a tendency to be abusive, as it could distort the economy to the extreme. It happened in the United States when government was distorting that if the people could not afford to buy a house, do not make housing programs, because it would eventually collapse. Then subprime mortgage appeared. (Another example) There was a government that did not deserve to join the European Union's common currency, but it was approved for Greece to join in. Then more problems arise. China's export-based economy, then the economy becomes very large but with a fixed exchange rate, do you think it is not because of the government's intervene? Intervention means creating more problems. The problems are getting bigger because of government intervention. We might never meet a new equilibrium point. What else do you think could cause this but the government? We're talking about China, Europe, United States of America, and others.