Enhancing Resilience to Turbulent Global Financial Markets: An Indonesian Experience

Sri Mulyani Indrawati, Ndiame Diop, Mohamad Ikhsan, Febrio Kacaribu

Abstract

In the empirical literature, large and abrupt declines in capital inflows, or sudden stops, typically hit asset markets and generate output losses in the receiving countries. The significant decrease in capital flows to emerging markets in 2018 is a unique opportunity to test this premise. Using Indonesian data, we found that the sharp decline in capital inflows for over two consecutive quarters in 2018 had an adverse impact on the currency, equities, and bond markets, but no discernible output loss was recorded. Real GDP growth remained resilient throughout 2018 and held broadly steady at around 5 percent in the first quarter of 2019. Furthermore, asset markets rebounded quickly, regaining most of the losses incurred by March 2019. We attribute this resilience to Indonesia’s strong macroeconomic fundamentals and responsive fiscal and monetary policies. We argue that to sustain this resilience in the years to come, complementary structural reforms to boost export-oriented FDI would be needed. The 2020 COVID-19 global pandemic has put the emerging economies to the test again, with a possibly more significant impact. We will revisit our analysis in the future in the aftermath of the pandemic.

 

Full Text:

PDF

References

Bandaogo, MS & Chen, YC 2020, ‘Duration of sudden stop spells: A hazard model approach’, Review of International Economics, vol. 28, no. 1, pp.105-118. doi: https://doi.org/10.1111/roie.12443.

Bloomberg 2019, Bloomberg Terminal [Online], Subscription Service, viewed at 30 December 2019.

Calvo, GA 2003, ‘Explaining sudden stop, growth collapse, and BOP crisis: the case of distortionary output taxes’, IMF Staff Papers, vol. 50, IMF Third Annual Research Conference (2003), pp. 1-20. doi:

https://doi.org/10.2307/4149912.

Calderon, CA, Chong, A, & Loayza, NV 2002, ‘Determinants of current account deficits in developing countries’, The B.E. Journal of Macroeconomics, vol. 2, no. 1, pp. 1021-1021. doi: https://doi.org/10.2202/1534-6005.1021.

Caner, M, Koehler-Geib, F, & Vincelette, GA, 2009, ‘When do sudden stops really hurt?’, Policy Research Working Paper 5021, World Bank. doi: https://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-5021.

CEIC 2020, CDMNext, viewed at 30 May 2020, https://insights.ceicdata.com.

Cúrdia, V 2007, ‘Monetary policy under sudden stops’, Staff Report 278, Federal Reserve Bank of New York.

Cusolito, AP & Nedeljkovic, M 2013, Toolkit for the analysis of current account imbalances, The World Bank, https://openknowledge.worldbank.org/bitstream/handle/10986/17005/832480WP0WB0Cu00Box382079B00PUBLIC0.pdf.

Debelle, G & Faruqee, H 1996, ‘What determines the current account? A cross-sectional and panel approach’, IMF Working Paper WP/96/58, International Monetary Fund, https://www.imf.org/en/Publications/WP/Issues/2016/12/30/What-Determines-the-Current-Account-a-Cross-Sectionaland-Panel-Approach-2039.

Diop, N 2018, ‘Global financial market turmoil: Why is South East Asia exposed but resilient?’, Viewpoint No. 353 [Report Number 133629], TheWorld Bank, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/167741547153878979/global-financial-market-turmoil-why-is-south-east-asiaexposed-but-resilient.

Eichengreen, B & Gupta, P 2016, ‘Managing sudden stops’, Policy Research Working Paper 7639, World Bank Group, http://documents1.worldbank.org/curated/en/877591468186563349/pdf/WPS7639.pdf.

Eichengreen, B, Gupta, P & Masetti, O 2018, ‘Are capital flows fickle? Increasingly? And does the answer still depend on type?’, Asian Economic Papers, vol. 17, no. 1, pp. 22-41. doi: https://doi.org/10.1162/asep_a_00583.

IMF 2019, World economic outlook: Global manufacturing downturn, rising trade barriers (October 2019), International Monetary Fund. doi: http://dx.doi.org/10.5089/9781513508214.081.

Kacaribu, F, Lumbanraja, AU, Revindo, MD, Sabrina, S, Pricilia, Z & Natanael, Y 2018, ‘Recent developments in Indonesia’s macro-economy and trade, Q1-2018’, Economics and Finance in Indonesia, vol. 64, no. 1, pp. 1-24.

Kraay, A & Ventura, J 1999, Current accounts in debtor and creditor countries, The World Bank. doi: https://doi.org/10.1596/1813-9450-1825.

Milesi-Ferreti, GM & Razin, A 1996, ‘Current account sustainability: Selected East Asian and Latin American experiences’, NBER Working Paper 5791, National Bureau of Economic Research, https://www.nber.org/papers/w5791.pdf.

Nedeljkovic, M, Varela, GJ, & Savini Zangrandi, M 2015, ‘Indonesia - Current account assessment’, Report Number 98206, World Bank Group, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/559731468187799610/indonesia-current-account-assessment.

Ostry, JD, Prati, A, & Spilimbergo, A 2009, ‘Structural reforms and economic performance in advanced and developing countries’, Occasional Paper No. 268, International Monetary Fund, https://www.imf.org/en/Publications/Occasional-Papers/Issues/2016/12/31/Structural-Reforms-and-Economic-Performance-in-Advanced-and-Developing-Countries-22594.

Ramayandi, A & Rosario, A 2010, ‘Monetary policy discipline and macroeconomic performance: The case of Indonesia’, ADB Economics Working Paper Series No. 238, Asian Development Bank, https://www.adb.org/publications/monetary-policy-discipline-and-macroeconomicperformance-case-indonesia.

Refbacks

  • There are currently no refbacks.