India and Indonesia: Lessons Learned from the 2013 Taper Tantrum

Abstract

In May 2013, the US Federal Reserve began to talk about the possibility of ending its program of quantitative easing. This tapering talk had a significant impact on five main emerging-market countries—Brazil, India, Indonesia, South Africa, and Turkey (the ‘Fragile Five’)—whose exchange rates weakened dramatically and whose stock and bond markets were hit hard. This series of events is now known as the ‘taper tantrum’. In response to the tantrum, these five countries each took a series of macroeconomic policy measures to relieve pressure in their financial markets. Indonesia and India handled the problem in the shortest time (about seven months) and achieved macro-economic stabilisation. This article examines how Indonesia and India managed to remain relatively unscathed by the taper tantrum and escape the Fragile Five. It looks at which policies the two countries adopted at the time, and why they chose them, as well as why India's economy performed better than Indonesia's after the tantrum.

Pada bulan Mei 2013, Bank Sentral Amerika Serikat melontarkan ide mengakhiri program quantitative easing (QE). Diskusi-diskusi seputar kemungkinan kebijakan ini membawa dampak yang signifikan bagi perekonomian negara berkembang seperti Brazil, India, Afrika Selatan, dan Turki (lima negara rentan, atau the Fragile Five), yang nilai tukarnya mengalami pelemahan secara dramatis dan pasar saham dan obligasinya terpukul kuat. Serangkaian reaksi ini kini dikenal dengan nama luapan emosi atau tantrum atas pemotongan QE, ‘taper tantrum’. Dalam merespon tantrum ini, kelima negara rentan tersebut mengambil langkah kebijakan makroekonomi untuk mengurangi tekanan terhadap pasar keuangannya. Indonesia dan India mampu menyelesaikan peristiwa ini dalam waktu yang paling singkat (sekitar tujuh bulan) dan segera dapat menstabilkan kembali kondisi ekonomi makronya. Tulisan ini menelaah bagaimana Indonesia dan India secara relatif berhasil menghindari dampak taper tantrum dan bahkan keluar dari kategori lima negara rentan. Ia membahas kebijakan apa saja yang diadopsi Indonesia dan India dan alasan pemilihan kebijakan-kebijakan tersebut serta mengapa kemudian perekonomian India berkinerja lebih baik daripada Indonesia setelah tantrum berakhir.

Keywords:

• quantitative easing
• asset purchases
• emerging markets
• Fragile Five

JEL classification:

• E52
• E58
• E65
• O53
• O57

Notes

1 In November 2016, the yield of 10-year Treasury notes increased significantly, suggesting that markets were expecting rates to rise (MarketWatch.com, 18 Nov. 2016). In addition, the Fed raised its benchmark rate in March 2017 and has signalled that there are more raises to come (CNN Money, 15 Mar. 2017).

2 In this case the index consisted of six variables: the current account as a share of GDP; foreign-exchange reserves as a share of GDP; short-term external debt as a share of foreign-exchange reserves; gross government debt as a share of GDP; the average annual inflation over the past three years; and any increase in the amount of bank credit given to the private sector, measured as the change in the ratio of bank credit to GDP over prior years.

3 For more detail on how Indonesia managed the TT, see Basri’s (2016) article.

4 Although not discussed in detail here, the steps taken by the OJK helped to calm the stock-market.