Three Years of Living Dangerously With Indonesia’s Radical Experiment

(Bloomberg Opinion) -- One of the nations most afflicted by Covid-19 and enjoying few of the spoils of the global economic rebound, Indonesia essentially declared the pandemic will last through 2022. The world’s fourth-most populous nation is keeping its finances on a wartime footing for an additional two years. For those looking to put a structure around the often-recited but still amorphous “new normal,” Indonesia offers one version.

Despite pledges a year ago that a radical financial experiment was a one-off, Finance Minister Sri Mulyani Indrawati said Monday that the central bank will again directly finance state spending. Not just in 2021, but through the end of next year. The step, which officials call “burden sharing” and is known more broadly as debt monetization, was framed as necessary given the prolonged health crisis. Under the program, Bank Indonesia will buy 215 trillion rupiah ($15 billion) of bonds from the government in private placements this year and 224 trillion rupiah next year. That follows the initial sum of nearly 400 trillion rupiah announced in 2020.  

When Indonesia went down this road in last July, it was thought a risky but understandable step. Legislatures and central banks everywhere were pumping massive amounts into economies during the deepest global slump in almost a century. It was a gamble because the practice broke one of the key tenets of economic orthodoxy: Monetary authorities don’t do fiscal policy and political meddling tends to produce subpar results. Since the Asian financial crisis of the late 1990s, Indonesia — together with many emerging markets — labored hard to gain credibility. It adopted inflation targets, scheduled regular policy meetings followed by press conferences and was at pains to stress independence.

Debt monetization challenged that picture and risked fueling faster inflation. Were it not for the unprecedented nature of the times, Indonesia might have been raked over the coals. That it survived with fairly minor fluctuations in its currency and bonds was testament to the outbreak’s severity. There was no scolding from the International Monetary Fund or the U.S. Treasury. In many ways, it should be a riskier undertaking today. The global economy is healing, inflation is a concern and a few central banks are starting, tentatively, to reel back some of their largesse.

You can’t blame Indonesia for piling sandbags. The country of 270 million people has been one of the most harmed by the coronavirus. It’s gone from denying it had any cases at all last March to this month passing the tragic milestone of 100,000 deaths. More than a third of fatalities occurred in July. Only a small fraction of its citizens are fully vaccinated. After shrinking for a year, the economy returned to growth last quarter, expanding 7.1% from a year earlier. That pace will slow as restrictions endure. The full-year expansion may be closer to 4%.

Investors largely gave Indonesia a pass last year. While the currency was the second-worst performer in Asia, the drop was limited to 1.3%. It’s been little changed the past two days and bonds have gained. Investors might even warm to monetization: The central bank purchases mean the market will have to absorb less debt. “The implication for supply is unambiguously positive,” Deutsche Bank AG wrote in a report Tuesday, recommending clients buy 20-year Indonesian debt.

With the global recovery still looking robust, if off its highs, emerging markets seem attractive. This is a potentially double-edged sword for Indonesia. It may benefit from a flow of funds into EM. Goldman Sachs Group Inc., Bank of America Corp. and Lazard Asset Management are bullish on EM equities, for example. Investors could be even more forgiving of heresy if growth is back big time. Or, with many to choose from, they could be more discerning. Truly unconventional things that have gone on under cover of Covid may get a more careful appraisal. 

There’s nothing inherently sinful about wartime finance — the West adapted its policies to the needs of both world wars. But maybe next time, Jakarta, remember one-offs in times of crisis have a dangerous way of becoming habits. Indonesia’s poor record with the pandemic necessitated more adventures, indicating there’s something inherently incompatible about living with Covid and normalization. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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