Governing The Market's Expectation

Not without notice, we have stepped our feet in the first quarter of year 2008. In this relatively short time, public have experienced many things in which they hold their breaths for. A grim shadow of the upcoming crisis continues to haunt every possible action as a consequence from the series of episode which always genial to the world. The subprime mortgage crises in The United States which then be complemented by the oil crises have functioned as a catalyst for numbness. With these precedent facts, a dingy description entitled the economic crises has potentially formed a negative expectation from the market. A dismal measure if which being prolonged could confirm the expectation. A prompt movement from the government is a necessary condition to cope with the confusion. An institutional duty which then be complemented by effective coordination and communication with other stakeholders like the Bank of Indonesia (BI), the Parliament and also the market.

Turbulence lead Stagnation

The contraction of the world’s economic capacity which are lead by the impediment of the United States’ economic growth and the rising of price from the world’s major commodity like oil and agricultural products have indeed pulled the Indonesian economic situation into a negative trend. The signals of slump could be noticed from the downward trend of public consumption as a consequence from the purchasing power impoverishment. This fragment would become natural if the movement of domestic economic structure came linearly with the global trend but it would become unnatural when it serves the opposite.

Take a look at Rupiah’s value, amid the positive campaign from the fed that cuts its interest rate to the very low level of 2,25 percent, the rupiah still look very sluggish to adjust from its initial level. An anomaly since the spread of the interest rate between BI rate and Fed rate has broaden in a way that it could act as an incentive to the fund owners to flood the Indonesian market with massive capital inflows which in turn make a leverage to the rupiah.

So, what is the problem actually? The keyword is expectation, in which the market still has negative expectation to the rupiah. An old story come to be retold, a story about decoupling effect which happens between the real economic sector and the financial sector, a story that still has not found the end. This fact contributes to the fragility of Indonesian economic base in which leads to the market distrust. One thing that should be noted is that the reason to invest in Indonesia, aside from the strong economic base, is because of the expectation from the investors to have future economic gains. The gap between the price of the stock and the issuance company performance could be seen as the positive expectation from them who prospect the increasing performance of the company, so that they could experience a stable profit in the future. In other words, the decoupling process between the real and financial sector should be seen as a rational economic bubble instead of a speculative one. The investors tend to expect the improvement of the real economic sector which can bring the sustainability of in the financial sector. Problem would arise if this expectation could not be fulfilled by the policy makers. Well, it happens now!

The expectation forming continues to become worsen with the prolonged case of BI’s Liquidity Assistance (BLBI) which involves BI’s high ranking officer. Credibility is at its stake, a very risky bet since credibility functions as a symbol to lead the market.

Long Run Solution for Indonesian Economy

Efforts to bring the Indonesian economy to its path is not like it has never been done before but it has not effectively done. The principles of a good macroeconomic framework are credibility, flexibility and political legitimation. Rule of law could create credibility if the rule is widely known and well understood by the public. With credibility, it will be easier to handle any economic turbulence with the policy instrument that is controlled by the economic authority. Credibility could function more when there is a transparent and an accountable framework in which strengthens political legitimation. Effective policy would merge up if the policy makers have the ability to react promptly in every unprecedented shock.

Credible policy makers are those who make the policy with respect for transparency. With the high level transparency, any economic shock would be easily diminished. Without transparency, every policy with regards to economic target and fiscal rule would become obsolete since the public could not compare between the target and the realization. This could turn into economic imbalances. In the level of practice, transparency could be created by the policy makers by publishing the analyses about future economic prospects and complement it with the analyses from the former economic policies which are conducted in the previous period. Furthermore, accountability could act as a major supporting factor for the transparency establishment. With the presence of accountable policy, a strong political legitimation would then arrive. More over, the political legitimation would become very important since the policies being made should reflect national consensus. This in turn creates balance of power and also general responsibilities which could reduce the negative effect from the uncoordinated policy.