Indonesia has a blunt message for the US Federal Reserve’s Jerome Powell and other global financial chiefs gathering in Bali this week: be mindful of the effects of your policies on emerging economies.
Even though authorities in the Southeast Asian nation are taking the right steps to stabilise the currency and keep deficits on the current account and budget under control, Indonesia is still being punished by capital outflows triggered by Fed rate hikes, Finance Minister Sri Mulyani Indrawati said in an interview on Tuesday. Better policy
coordination is needed among the International Monetary Fund’s 189 members to shield emerging economies, she said.
The US “needs to be very mindful that spillover from the effect of their policies is very real for many countries,” she told Bloomberg Television in Bali. With Indonesia hosting the IMF-World Bank meetings this week, “I do hope Jerome Powell, Mnuchin, China, Japan, Europe will be fully aware that you are in a country that is doing all the right things, yet we have to be very
vigilant with the global environment changing very fast.”
Indonesia has been swept up in the rout that’s hit global emerging markets this year as rising US interest rates, a stronger dollar and a worsening US-China trade conflict prompt investors to dump riskier assets. The rupiah has slumped to its weakest level in two decades, breaking through the 15,000 level to the dollar last week despite strong action by authorities, including interest-rate hikes, import curbs and delays to some project spending.
Indonesia expects the US “to design policy with a path that creates a friendlier environment for many emerging countries to adjust to,”
Indrawati, a former World Bank managing director, said.
The Fed isn’t immune to the effect of its policies on emerging markets. Powell said last month that what happens in the rest of the world economy, including developing nations, “really matters to us, in carrying out our domestic mandate.” The central bank is trying to be “very transparent” on its actions, he said.
The escalating trade war between the US and China as well as the volatility that has engulfed emerging markets are set to be high on the agenda at the Bali gathering after the IMF on Tuesday trimmed its global growth forecast. The fund also warned that risks to the global outlook have risen in the last three months, which would accelerate capital flight from emerging markets.
While South African central bank Governor Lesetja Kganyago sees the reaction to policy normalization globally playing out as expected, the trade war has muddied the waters.
“I don’t think that the Fed is reckless, I’m sure they take account of these things,” he said in an interview on Bloomberg Television from Bali. “What we didn’t foresee was that this could be taking place at a time when escalating trade tensions would then complicate the whole picture.”
India, Indonesia and the Philippines are among the hardest hit economies in Asia and Bank Indonesia Governor Perry Warjiyo has said there is a need to synchronize fiscal, trade and monetary policies to ensure the sustainable recovery of the world economy. He called on the IMF and World Bank to consider how to “better synchronize, harmonize international policy conditions in the normalization process for monetary policy” and how the response to current trade tensions could “be more multilateral.”
Warjiyo was set to discuss the impact on emerging economies of policy normalization in advanced countries in talks on Wednesday with Federal Reserve Bank of New York President John Williams.