JAKARTA - The Head of Economics at Trimegah Sekuritas Indonesia, Fakhrul Fulvian, believes that efforts to stabilize the rupiah exchange rate cannot rely solely on monetary policy, so support from the fiscal side is needed to maintain market confidence.
"Bank Indonesia has given a clear signal to the market that the stability of the rupiah is a priority. The increase in interest rates is the right and necessary step. However, after this, the market will begin to see whether there is a follow-up from the fiscal and financial market management side. BI cannot work alone," said Fakhrul in his statement in Jakarta, quoted by Antara, Saturday, May 30.
According to Fakhrul, the government and the Ministry of Finance have actually shown the ability to encourage economic acceleration in recent times.
Various development programs, acceleration of spending, downstreaming, and efforts to increase the country's capacity have managed to maintain the momentum of growth in the midst of an uncertain global environment.
However, he also reminded that economic management can be likened to driving a vehicle, which in certain conditions needs to press the gas pedal and in other situations reduce speed when facing a sharp turn.
In this context, pressure on the rupiah, changes in global liquidity conditions, and increased risk premiums in the international financial market require more careful policy adjustments.
He noted that the shape of Indonesia's yield curve, which is too flat, is one of the market's concerns, because it has the potential to provide less accurate signals regarding risk prices in Indonesia.
The yields of the 1-year and 10-year government bonds of Indonesia are currently in the range of 6.7 percent. Fakhrul said that this condition is unusual, so the market is starting to question the mechanism of price discovery that occurs.
This condition is ultimately reflected in investors' perceptions that Indonesia's risk premium is currently not fully reflected in the long-term bond market, thus putting pressure on the rupiah.
Furthermore, according to Fakhrul, improving the structure of the yield curve is necessary to help strengthen long-term stability and reduce pressure on the rupiah.
"We are not talking about uncontrolled yield increases. What is needed is normalization. A healthy yield curve is a yield curve that is able to reflect risk, inflation expectations, and funding needs in a transparent manner. Market credibility cannot be bought through continuous yield suppression," said Fakhrul.
Fakhrul assessed that the government had a legitimate interest in keeping the cost of funding low, especially in the midst of the need for large development financing. However, in a situation where rupiah stabilization is the top priority, there is a trade-off that needs to be accepted.
On the other hand, according to him, the space to encourage growth aggressively remains open after stability has been restored.
"This is not a matter of choosing between growth or stability. What we need is the right order. Currently, stability must be strengthened first. After that, the government will have a much greater space to encourage growth again, reduce funding costs, and accelerate development," said Fakhrul.
Therefore, according to Fakhrul, the next phase of Indonesia's economic policy is no longer merely about monetary tightening, but rather about better policy coordination between the government and Bank Indonesia.
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