Indonesia unveils the first of 3 stimulus packages

This is the first stimulus package to be unveiled and a second will be announced in October. The main focus is to spur new businesses. Cutting red tape is the priority and the government will simplify a long list of 89 regulations. Among others, there will be easier regulation for new industrial zones, new policies to speed up fiscal disbursement in rural areas, and easier access for exporters to get financing. The government also indicated its commitment to boost property investments, develop the shipping industry, and support micro enterprises. 

On the monetary side, Bank Indonesia (BI) unveiled a string of policies, mostly directed to anchor confidence on the economy in the immediate-term. The focus is on inflation, rupiah and the risk of capital outflows. Coordination with the Ministry of Finance team will be strengthened to monitor inflationary risks at the provincial and municipal levels. BI reiterates its commitment to be active in the FX market, to prevent excessive volatility of the rupiah. The central bank will also step in to intervene in the IDgov bond market, when necessary. Meanwhile, the central bank issues new term deposits with 6-month maturity as well as reintroduces the 9-month and 12-month Bank Indonesia certificates (SBI). 

On this last point, the idea is to provide extra instruments to tap into excess liquidity from foreign currency deposits in the domestic banking system. There could be some positive reaction in the markets. But the government has to show that it can deliver these changes. It is at the implementation phase that many government policies have been delayed thus far in Jokowi's term. As for BI, restoring confidence on the rupiah remains the key to lift sentiment among local businesses. Adapting to a new normal is difficult if rupiah volatility were to continue. It is why investment growth is trending below 4%, far from its longterm average of almost 8%. As long as the strong US dollar theme dominates global markets though, it is difficult for the rupiah to gain significant grounds against the dollar.