The Allure of Bread and Circuses
The 2018 Asian Games began a few days ago, and the headlines have been filled with stories of the athletes’ heroic achievements. Just as in the Roman Empire, this grand event has managed to draw public attention away from various problems, such as the heated preparations for the presidential election, the instability of the currency and even an earthquake in Lombok, an island east of Bali.
People were enthralled by the event’s spectacular grand opening ceremony. Before the ceremony, people had been skeptical about how the event would unfold (especially since physical preparations were not complete until just a few days before the big day). But apparently the organizers had been quietly preparing around the clock, to produce a spectacular opening to the Games. People were so deeply touched, and so carried away with the elaborate pomp, that it was as if the event could really unite people around the country. The public was surprised that Indonesia could stage such a spectacular event -- almost in the same class as an opening ceremony of any of the Olympic Games. Confidence rode high.
Before this grand event, the Central Board of Statistics released a report on the national account, showing that the economy was progressing well. Growth was 5.27% in Q2, up from 5.06% in Q1, and higher than in the same period of 2017 and 2016. Moreover, growth was contributed by the rebound of consumption spending, and the growth of investment and exports.
The government’s main concern was that benign economic growth was accompanied by a significant rise in the current account deficit. In Q1, the CAD was at 2.21% of GDP; in Q2, it grew to just over 3%. Even though the financial and capital accounts of the balance of payments recorded a higher surplus, the overall balance of payments still reported a higher deficit, of around $4.3 billion, which led the Central Bank’s foreign exchange reserves to decline to $119 billion at the end of June. FX reserves fell further in July, to $118.3 billion.
The Central Board of Statistics has also just released balance of trade data for July. Contrary to my earlier prediction, there was a huge deficit. In the past, the seasonal pattern showed a return to surplus after Ramadan. This year, we saw a significant rise in imports, though exports rose significantly, too.
The statistics board also released its inflation report, which showed relatively mild inflation, of 0.28%, for July. That put y/y inflation at 3.18%, in the lower part of the Central Bank’s target corridor. Yet during its August council meeting, the Bank decided to raise the benchmark interest rate by 25 basis points, to 5.5%, to reduce domestic currency volatility against dollar.
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