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Quantitative Easing Gone Global

Quantitative easing (QE) has now gone global since its introduction by the Japanese Central Bank in the early 2000s and its adoption by the US and European countries following the 2008 financial crisis. QE is a form of unconventional monetary policy where the central bank purchases longer-term securities from the open market to increase the money supply, encourage lending and investment. On Wednesday (06/17), emerging markets started implementing QE to bounce back from the economic downfall caused by the pandemic. The implementation of QE in EM is no longer considered taboo, although it is often deemed controversial for being associated with a "money-printing" policy. Even though it is riskier for countries that rely on borrowing in foreign currencies from global investors, several parties believed that it could be a useful policy to stimulate the economy when other options are washed-up, it can be success in countries that have the hard work essential to build pools of domestic capital and self-assurance in economic and fiscal authorities. One reason to be optimistic is the middle-income countries have started QE such as Croatia, Republic of Poland, and Rumania have launched their initial programs earlier this month, whereas the Hungarian Central Bank has started its bond-buying program.

Central banks from countries all over the world have also executed a policy of buying local-currency government bonds and other assets as a means to combat the economic downfall caused by COVID-19. This includes Poland, Philippines, South Africa, Turkey, and not to mention Indonesia, despite facing a financial turmoil. Unlike QE policies implemented before, this policy is going to be different, denoting the fact that numerous central banks have slashed interest rates to up to near zero. According to the benchmark of the JPMorgan EMBI Global Diversified index, sovereign bonds have escalated to up to 20 percent since March. This is also supported by the Fed's policies, which include diminishing interest rates and constructing programs such as lending facilities to make sure households and enterprises could access credits. Fidelity International’s emerging market portfolio manager also expressed that the near-term outlook for emerging markets was “positive”, buoyed in part by central banks globally now snapping up assets.

Indonesia has also decided to implement QE along with a number of monetary and fiscal policies to make sure the economy recovers considering the significant ramifications brought by the pandemic. Experts believe that spending was needed to help bounce back the economy, especially after the collapse of economic activities in the private sector. In an interview with Financial Times, Indonesia's Finance Minister, Sri Mulyani Indrawati, expressed that the pandemic triggered a "perfect storm" of falling government revenue, rising fiscal spending, and volatile financial markets, leaving the government being the only player in town. Ever since the pandemic emerges, Indonesia has endured an Rp125tn ($8.83bn) of capital outflows in the first quarter and followed with a yield on the 10-year rupiah-denominated government bonds increasing from 6.5 percent in February to 8.3 percent in late March. Although economists are opposing QE due to the risk of inflation and a collapse in the foreign exchange rate, Changyong Rhee, IMF's director of Asia Pacific department, expressed that QE is Indonesia's economy last resort. Mr. Rhee believed that Jakarta has promised full commitment in maintaining the reputation and independence of its central bank, and therefore will implement the policy adequately. QE is also believed to result in a favorable outcome as it will create liquidity and allow foreign funds to enter the country. According to Perry Warjiyo (6/5), Governor of Bank Indonesia, this inflow of foreign funds is caused by the confidence of foreign investors towards Indonesia's economic stability. "Inflow to SBN reached Rp 2.97 trillion in the second week, then the third week of Rp 6.15 trillion and the fourth week of Rp 2.54 trillion. While in early June 2020, it reached Rp 7.01 trillion," Mr. Warjiyo added. Meanwhile in the stock market, The QE policy gives a positive sentiment to the IDX Composite alongside with the cut in interest rate by Bank Indonesia. IDX Composite shows an increase for 0.35% to the level of 4,924.27 at the closing on Friday (6/19). The increase in IDX Composite happened in the same state with the surge in net foreign sell valued at Rp 661.02 billion. In conclusion, although QE is controversial for its risks and the collapse it may inflict, it may bring upon benefits for Indonesia, especially in emergencies.


CNBC Indonesia

The Financial Times

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