These are the risks that Indonesia will face in the event of monetary tightening in the US

ILLUSTRATION. Office area in Jakarta, Tuesday (19/1). /pho KONTAN/Carolus Agus Waluyo/19/01/2021.

Reporter: Bidara Pink | Editor: Tendi Mahadi

KONTAN.CO.ID – JAKARTA. The central bank of the United States (US) The Federal Reserve is expected to increase interest rates next year. Bank Mandiri economist Faisal Rachman outlines several effects that will be felt by Indonesia when the Uncle Sam’s monetary tightening occurs.

First, there is an increased risk yield SBN if tapering this is faster than expected. However, Faisal sees, there is actually room for improvement yield SBN is still available because of the 2021 APBN assumption, yield 10 -year tenor SBN is 7.29% or still above yield now.

“So, actually our fiscal management in terms of financing is still quite qualified for that. In addition, the world rating agency also assesses that Indonesia is still classified as investment grade with the majority outlook stable, “said Faisal to Kontan.co.id, Tuesday (1/6).

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Second, there is a risk of foreign capital inflows out of the domestic financial market, causing the rupiah to weaken. However, this can be minimized by reducing the potential for widening current account deficit (CAD) by starting to increase import substitution.

Not only that, Indonesia can also increase the proportion of direct investment or foreign direct investment (FDI) because outflow what happens is more to short-term portfolio investments (hot money).

“So, by making direct investment more dominant in the balance of financial transactions, the risk of tapering Indonesia’s Balance of Payments (BOP) can be minimized,” he added.

Faisal then reminded that the real concern is when the Fed increases interest rates or tapering occurred, but the domestic economic recovery is still not optimal.

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The reason is, the increase in the Fed’s interest rate is one of the factors that underlies the increase in the BI benchmark interest rate. In fact, economic recovery requires relatively low interest rates to trigger investment activities.