Why was Rupiah the most depreciated currency in the world during COVID-19?

 Bank of Indonesia

Indonesia’s central bank has cut its benchmark interest rate (targeting seven-day repurchase rate) at 3.75 percent for two consecutive months. Indonesian bank has reduced its policy rate by 125bp in just 2020 after pandemic hits. Indonesia has chosen untraditional way of monetary policy in the use of tactics of directly financing the government’s fiscal deficit. This is unlike other central banks since they buy the bonds form secondary markets such as commercial banks or financial institutions (for example: Blackrock or PIMCO in U.S.) The direct government bond buying from central bank was possible after a panel of people in parliament recommended a revision to the central bank law.

Investors concern whether the government will have a larger role in the central bank’s policy decision. In the 1999 Central Bank Act, BI have mandates to maintain currency stability and manage inflation by supporting economic growths and jobs. However, as government takes most of the part in central bank’s decision-making, central bank won’t have full right in setting interest rates and issuing new monetary policy.

Rupiah

The rupiah has declined almost two percent this month and more than 6.5 percent in just 2020. The performance of Rupiah was the worst in Asia. I can think of two factors that make Indonesian currency weaken this year: fear of pandemic and BI’s super-dovish stance.

A surge in pandemic in Jakarta has added pressure on depreciation. As foreign investors worry about the fundamental of Indonesian market, they had to cash their assets and exit from there. In the process of exit, investors need to exchange Indonesian Rupiah to their native currency. If demand falls, then the value falls which made Rupiah into devaluation. BI is prompting intervention in the currency market to prevent the outflow of their own currency.

BI has pledged to buy $27 billion of government bonds in the primary market in the condition of relinquishing interest payments as one-off purchase in the reason of $40 billion fiscal expenditure for countermeasure against pandemic in 2020. The yield on 10-year Indonesian government bonds was 7.2%, but BI promised to buy it in higher price exempting interest payment to 0%. This means central bank is printing more money than its actual value. This will lead to more liquidity environment which is vulnerable to their currency value.

Slow Recovery

Recent economic indicators are sending risk signals on the pace of recovery in Southeast Asia's largest economy. Manufacturing and consumer confidence and retail sales data were falling, and exports and imports declined more than expected in August. Dis-inflationary circumstances were caused by sluggish domestic demand in both July and August. Inflation rate has shown a little uptick from last year which is 1.32%. (BI’s target is 2%-4%)

“Finance Minister Sri Mulyani Indrawati said Tuesday the economy could suffer a more severe contraction in the third quarter than previously forecast due to the renewed social curbs in the capital. For the full year, she expects economic growth at the lower end of the government’s outlook, which ranges from 0.2% growth to a 1.1% contraction”, Bloomberg reports.

Central banks in emerging market

Covid-19 has hit worldwide economy; global trade has begun slowing, great lockdowns interfered outdoor travels, corporates had no choice but to furlough workers which led to the rise of unemployment rate. Financial market has also been in a fearful strike as investors worry about their plunging assets. At least, expectation of strong economic growth from advanced countries is good news as many believed that the worst had passed. Their stock market quickly recovered from the bottom point recorded in March.

However, emerging market has different story with the advanced countries. Countries like Indonesia, Philippines, India, Russia, Brazil, and Turkey are in economic crisis as pandemic has been spreading rapidly. Central banks like India, Indonesia, or Philippines have eased their monetary policy which can lead to downwards on their credit ratings. For example, Bangko Sentral ng Pilipinas, the central bank of the Philippines announced that it would implement 300 billion Philippine peso (about $6.2 billion) government bond repurchase agreement with the country's Treasury Bureau for six months at most. Excessive stimulus programs like sovereign debt purchases in response of pandemic recession, can damage central bank’s future cuts and tapering and monetary authorities can lose credibility.

S&P Global concerned that the purchase program does not only result to an inflation problem but also lead to debt issuance surge and currency depreciation. "Sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetise fiscal deficits without running the risk of higher inflation”, says the analysts. "This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade." S&P has downgraded more than 50 government ratings as level of debt is are set to continue of spiral.

Source: Bank of Indonesia, Bloomberg, The Economist

https://www.bloombergquint.com/onweb/bank-indonesia-seen-on-hold-as-rupiah-pressured-decision-guide

https://www.bi.go.id/

Global Monitor

Jumia: rise, fall and opportunity. (Africa)

As we think of e-commerce firms or platforms, we may think Amazon and Alibaba are the most influential companies in the world. In U.S, Amazon is the most dominant company in terms of e-commerce platforms, operating 1p (first party) and 3p (third party) which compete each other. In China, Alibaba dominates the online retail market providing best service to the consumers regarding delivery, price, and its identical entertainment-based marketing. However, there are valuable companies other than the two I mentioned above. One of example of prospering e-commerce company, Mercado Libre, is based in Argentina which dominates South American retail market. Other example is the e-commerce platform called Jumia Technologies which is operated in African market. I personally found this company very attractive as online shopping market in Africa has great potential to grow more than what we think.

What is Jumia

Jumia is considered as “Amazon of Africa”, founded in 2012 by Jeremy Hodara and Sacha Poignonnec, previous McKinsey consultants. It is the largest African e-commerce platform which has wide variety of products and categories such as electronics and fashions. Jumia also provides logistics and payment services which make user-friendly environment to African consumers. They have about 50,000 local partners, 81,000 sellers, 6.8 million active users (previous year was 4.8 million), and more than 5,000 employees all over Africa (which is mostly furloughed or fired recently). 

Rise and fall

Moreover, Jumia is the first African tech companies listed in New York Stock Exchange in April 12th 2019. The IPO of the company was a great hope for African firms enough to have a dream to be traded in America. The share rose about 75% on its first day of listings and reached the market capital of 3.9 billion dollars. However, in May of 2019, Jumia had suffered from the short-seller Andrew Left of Citron Research who claimed Jumia as “securities fraud”. The share price plunged half in a week after the report of high possibility of fraud. In April 2020, Rocket Internet, German investment firm, which owned 28% of Jumia, announced to sell the shares. 

Opportunity

As a rise of COVID-19, more demand through online has increased. The worldwide e-commerce platform was in boom as consumers started to stay at home. Africa was not exceptional. Africa is the continent where online retail market is growing. They have 52 different countries which consist of potential 1.3 billion consumers and 17 million SMEs/merchants for online shopping business. Mobile market in Africa is expected to half-double in leading countries over the next five years which means over 300 million smartphones will be added to the market. 

“There is enormous opportunity. In absolute numbers, Africa may be smaller right now than other regions, but online commerce will grow about 30% every year. And even with wider global declines, online shoppers are growing twice as fast. Stripe thinks on a longer time horizon than others because we are an infrastructure company. We are thinking of what the world will look like in 2040-2050.”   - Patrick Collison

Source

https://ecommerceiq.asia/africa-ecommerce-jumia/

https://www.iafrikan.com/2020/04/03/jumia-rocket-internet-new-york-stock-exchange-wall-street-sale-african-startup/

How will Biden Administration affect global trade?

Joe Biden (Democratic Party) was selected as US president in November 2020. U.S economy has been stagnant since the emergence of COVID-19, which diminished purchase power of overseas supplies. However, if the US economy recovers as economic stimulus measures reach agreement, the demand from U.S. consumers will increase, which is good news for global economy and trade. Nevertheless, due to the increase in monetary base and the velocity of dollar supply, it is highly likely that Biden's major pledges will act as a pressure to appreciate other currencies (only Turkish Lira is depreciating its value). There is also high possibility that Biden will maintain a strong policy toward China to protect U.S. industries, which is in need for other countries to monitor and prepare.

Dealing with China

Similar to the previous Trump administration's trade policy, Biden administration will also show strong stance towards China in terms of trade through strengthening solidarity with the alliance. It is expected to respond strongly to unfair trade practices in China in collaboration with allies and expand to areas such as human rights, labor, and the environment (climate change).

Protective Trade Measures

The possibility of withdrawing tariffs against China and Article 232 measures imposed by the Trump administration is expected to be low, and import regulatory measures such as anti-dumping and countervailing duties are expected to continue to protect domestic industries.

Trade Agreement 

It is a position that it will not proceed with a new trade agreement immediately after election, and even if a trade agreement is promoted, there is a high possibility that the Democratic Party will demand strengthening of requirements such as labor and environment provisions traditionally emphasized.

These three factors are the position that the United States will lead the world trade order and rebuild the leadership of the United States through multilateralism and restoration of trust with allies.

How will these affect to the global trade? The recovery of the US economy through expansion of stimulus package and rules-based trade policy are expected to have a positive effect on global trade, but there is a need for continuous monitoring of disputes between the US and China and fluctuations in exchange rates and oil prices, and protective trade measures (Buy American). 

To conclude the existing concept of US-China conflict remain unchanged. Unlike Trump's unpredictable and extreme tariff wars, trade policy with China is likely to become an imprisonment for China through coalitions with allies. Therefore, the trade dependent country like Japan, Korea and Taiwan should pay close attention to Biden's economic pledges and the process of industrial protection policies.

How should we prepare for rapidly changing labor market?

What would be the keyword that describes the incident in 2020? A few might answer Presidential Election in U.S. is the most significant issue in this year, others will answer the conflict between U.S. and China. But majority will indicate COVID-19 as the biggest issue in 2020 that happened world-widely. In the first half of 2020, the major concerns that investors had was about how to respond to the pandemic; the second half was more of preparing post-pandemic life. 

Pandemic is just a trigger 

Pandemic has accelerated the structural shift that were already been planned throughout 2010s. Globalization on service sector especially on information technology, finance or investment has been speeding up whereas international transfer of goods and people has diminished. As lock-down was implemented to countermeasure against the pandemic, people started to stay at home. The demand on in-house service surged as indoor time spending increased. Consumers started to shop online through e-commerce platforms, food delivery was in high demand, and needs for stay-at-home device such as laptops, projector screens and home training equipment were inevitable. The change does not only apply to the lifestyle, but also the frame of education and work.

Working trend now

The article "After the Pandemic, a Revolution in Education and Work Awaits" written by Thomas Friedman shows how much the education and work trend will change according to the spread of COVID-19. The border between employers and employee will blur. Why? Video conference platform, Zoom has been one of the issue during 2010. In fact, Zoom was the only major company which has profit among the firms which were listed public in 2019. This is the sign that remote workers have increased significantly due to the great lockdown. In New York Times, staffs in 1990s had to work at office, where as they are now working at home. They are both full-time workers but the working environment has shifted significantly! Unwanted job status shift to freelancer was inevitable as furloughs were progressed from their own companies.  The place we work is not a considerable issue now. The frame has changed more than we think!

In the future

Many job-seekers are young generations worry about gradual job decrease due to development of artificial intelligence and automated robot systems. It is true that AI can replace the jobs which had less productivity to save more time. As shareholders require more earnings to the corporate, employers may lay-off more staff in need to secure cash and invest on something more profitable which can be seemed to lead more of unemployment rate. However it is not true. AI would not take the job, instead will create more of work. 

Luddite fallacy

Do you remember the incident in the 19th when industrial revolution was on the movement? To explain the background, The Luddites were a group of English textile workers. It is found that they were violently destroyed as new machines were supplied. People started to worry that the rise of new machines will take over the power of labor market. However, the new technology did not lead to overall unemployment in the economy. Somehow, it destroyed the existing jobs with low skill, however, the new demand surged as technology enhanced. This is called the Luddite fallacy that new technology creates new field of jobs. 

Future talents

As mentioned above, AI and automated machines will replace the job with low skills. This means that jobs with low barrier will gradually replaced by automation. The new jobs will emerge as technology develops. Competent workers will be in the demand to operate the firm efficiently. The trend of staff working permanently in only one company will slowly fade away as need of new ability rise. Workers or job applicants might change the work frequently. In order to be suitable for the company, people need to adapt to new technology and learn frequently. Learn-and-work is not applicable in the recent jobs; each applicant should have learning ability by themselves in using their private time. 

The future education in university or college will also change its position. As technology and demand of consumers are  constantly developing, university should be the place for nurturing students to be ready-workers in any environment. The studies in university should be more practical and useful in their future career and jobs. The workplace is not for learning or studying. It is to prove themselves how competent they are to accomplish their mission. The trend is rapidly changing and demand for adaption in new technology is skyrocketing. Employers will change employees more often, and employees will change the jobs very frequently by demand in new skills. That is what I think the labor market will be in the future. 

Source: NYT

https://www.nytimes.com/2020/10/20/opinion/covid-education-work.html?searchResultPosition=1

Source: Luddite Fallacy

https://www.economicshelp.org/blog/6717/economics/the-luddite-fallacy/

Market scenario when Democratic Party sweeps [Blue Wave].

As the US president, one third of the Senate and the entire House of Representatives comes to a close (November 3^rd, 2020), a survey found that Democratic Party candidate Joe Biden continues to lead the race against Republican candidate Donald Trump by big difference according to CNN. Reportedly, in a poll of voters who are willing to vote, Biden was leading Trump 54% to 42%. It was analyzed that the gap between the two had been the largest for 20 years. However, we do not know whether the poll is exact or not due to many reasons as some insist CNN is part of Democratic Party supporter. Forecasting which party will take over White House and Congress is fairly impossible. But the guesses of market direction are emerging as polls indicate that Democratic Party is about to sweep.

Bond Market

The scenario that can cause the greatest volatility in the bond market in the short and long term is when Democrats occupy both the White House and the U.S. Congress. If this scenario is comes to reality, the US 10 year Treasury is expected to surge creating bear steepening yield curve. In order to cover the 2 trillion +a stimulus plan, more fiscal budget is needed. Therefore, the government will likely to raise tax and issue additional treasury. Therefore, as supply of government bond increases, the more interest rate is needed to raise the fund for stimulus package.

Stock Market

Meanwhile, a steep rise in Treasury yield is expected to have a negative impact on the US stock market. If tax hikes and new taxation are implemented as Democratic Party's pledge, it will lead to ‘crowding-out effect’ with investors in risk-off stance and a decline in corporate investment. However, there is possibility that stock market would not fall very sharply due to hope in support of policy mix; combination of monetary and fiscal policy. Since the liquidity environment is being floated, the risk of the crowd out effect is not very big deal. The outlook for the stock market is quite mixed due to many possibilities.

Currency Market

The dollar has been weakened mainly due to three reasons: relatively strong Chinese GDP growth has made Chinese currency attractive, investors are buying Chinese corporate bonds (yields are higher than U.S) as Chinese government is steadily in progress in opening their financial market, and expectation of Democratic Sweep (Blue Wave). This can be quite controversial as many investors think that treasury yield increase, the value of currency rise together. However, the yield only applies to market interest rate (usually 10 year). Since Fed is targeting call money rate (short term interest rate), low chance of strong dollar will likely to appear. Fed will continue increase money supply as more stimulus package is needed, therefore, more chance of inflation will emerge, which means real yields will fall more than nominal yields grow. Please check my blog below.

https://techongstudy.blogspot.com/2020/09/real-yield-is-reason-for-market-mover.html

Global Trade

Candidate Biden and Democratic Party's trade pledge does not differ much from the current Trump administration's trade policy. Candidate Biden pledged to promote trade policy that benefits Americans such as labor market. The policy is to recover domestic unemployment rate deteriorated by COVID-19 and strengthens domestic manufacturing industry in the slogan of 'Made in America' and 'Buy American'. “Economic security is national security”. Biden announced to correct China's unfair trade practices and reform China's structure, which undermines the multilateral trade order. The strong policy toward China is expected to continue regardless of the election results.

Source: Saint Luis Fed 

https://fred.stlouisfed.org/series/T10YIE#:~:text=The%20breakeven%20inflation%20rate%20represents,Constant%20Maturity%20Securities%20(TC_10YEAR).

Source: U.S. DEPARTMENT OF THE TREASURY

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield