Indonesia and India, the two emerging markets hardest hit in recent weeks by falling currencies and other financial troubles, took opposite tracks as both countries struggled to balance growth with the threat of inflation

September 20, 2013

Amid Economic Stress, Differing Strategies Emerge


JAKARTA — Indonesia and India, the two emerging markets hardest hit in recent weeks by falling currencies and other financial troubles, took opposite tracks on Friday as both countries struggled to balance growth with the threat of inflation. In an interview here, the vice president of Indonesia characterized higher interest rates and a weakened currency as the “new normal.” Boediono, the country’s vice president, who uses only one name, said that Indonesia would face a tougher international financial environment in the coming months and should give greater emphasis to a stable currency, stable prices and a stable trade balance and not just pursue economic growth.“We have been addicted, so to speak, with an easy-money environment for four years,” said Mr. Boediono, the main architect of Indonesian economic policy since the Asian financial crisis in 1997 and 1998. “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.

But in Mumbai, the new governor of the Reserve Bank of India suggested that India faced less of an international threat after the Federal Reserve decided on Wednesday to continue its economic stimulus, at least temporarily. The governor, Raghuram Rajan, lowered a key interest rate on Friday by three-quarters of a percent, although he raised another less important rate by a quarter of a percent.

India pushed interest rates up sharply over the summer to make financial investments there more attractive and slow the fall of the rupee. Reversing part of that increase now “will provide a boost to growth, reduce the financing distortions that are emerging in the market, and reduce the strain on corporate and bank balance sheets,” Raghuram Rajan, the new governor, said Friday at his first news conference on monetary policy.

In monetary terms, India is zigging while Indonesia is zagging, despite the many common challenges that have pummeled their currencies and stock markets in recent weeks. Both must balance a need to preserve economic growth for large, heavily poor populations, while at the same time preventing a buildup of inflation that might discourage longer-term investments — a tricky balancing act that has bedeviled policy makers in the United States and other affluent countries over the years.

India, with a population of about 1.2 billion, and Indonesia, population 250 million, are both struggling to modernize their infrastructure while stuck with complex land ownership laws that make it hard to redevelop cities rapidly. Both are wrestling with costly but politically popular fuel subsidies that are driving up government budget deficits, and both have indignant publics demanding an end to endemic corruption.

Economically, both have sizable current-account deficits compared to their economic output, together with nearly double-digit inflation in consumer prices.

Perhaps most important, both face national elections next year that limit their ability to make politically unappetizing economic decisions: India will elect a new Parliament by the end of May, while Indonesia will elect a new legislature in April and a new president in July.

The different policies outlined on Friday in Jakarta and Mumbai reflect differences in the seriousness of their predicaments, however, with India appearing to be in considerably worse shape.

While Indonesia’s ports and highways still have shortcomings, as does the country’s bureaucracy, they are good enough that the country has emerged as one destination for the many companies shifting operations away from China in response to surging blue-collar wages there. India’s bureaucracy remains stifling, and the potholes and traffic on the country’s roads are so bad that vehicles scarcely move faster than walking speed in some areas; in other areas, sometime gruesome crashes are a regular occurrence.

Above all, India’s is the more fractious democracy. Indonesia gave political independence to its central bank in 1999, right after the Asian financial crisis. The Bank of Indonesia raised short-term interest rates last week, but the country’s business community remains supportive — Sofjan Wanandi, the influential tycoon who is the chairman of the Employers’ Association of Indonesia, said in an interview this week that business leaders were ready to pay even higher interest rates as needed to control inflation.

By contrast, the Reserve Bank of India is subject to the dictates of the government. The Confederation of Indian Industry, the country’s most powerful business group, representing the large companies that tend to receive most of Indian bank loans, has been lobbying heavily in recent weeks for a full cut of one percentage point in lending rates.

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.

Vice President Boediono of Indonesia, a former finance minister and governor of the central bank, said Friday that the Fed’s decision on Wednesday to defer a reduction in economic stimulus offers Indonesia a breathing space but does not remove the necessity for prompt action by policy makers here.

While avoiding 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.”

He called for a series of supply-side measures to address bottlenecks in the economy that could fuel 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 stretches a similar distance as Seattle to Tampa.

“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.

President Xi Jinping of China is scheduled to come to Jakarta next 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.

Mr. Boediono said that he would discuss with President Xi the possibility of expanding the bilateral swap agreement between the two countries, but 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 was elected vice president in the summer of 2009 when President Yudhoyono won a second term. Legislative elections are scheduled for next April and presidential elections for next July; President Yudhoyono is not running for a third five-year term because of term limits.

As a technocrat with a limited 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 hoped to focus on online education thereafter.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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