08/25/2015
Asia / Currencies
Bank Indonesia is no longer tolerant of a weak Indonesian rupiah. This change in perspective could be the first step in restoring domestic confidence in the currency.
Bank Indonesia (BI) remains in the market to prevent excessive weakening of the Indonesian rupiah. Last week’s monetary policy statement and the accompanying media briefing also signalled that BI is no longer tolerant of a weak rupiah.
BI’s tolerance of a weak rupiah was never meant to last forever. There are direct inflationary impacts from a weak rupiah. Despite falling oil prices, domestic fuel prices will go up if the rupiah falters further. More importantly, given the high import content of production, a weak rupiah is becoming a major drag on the economy. And, going by the poor export growth thus far this year, any supposed positive impact on external demand is practically non-existent.
Crossing the 14,000 rupiah level against the US dollar was pretty much a broad US dollar move. The country’s macro risk has arguably improved by quite a bit since 2013. The current account deficit was at 2% of GDP in the first half, compared to 4% in mid-2013. The ratio of foreign reserves to short-term external debt has also gone up to about 225% in June 2015, compared to 195% in September 2013. BI’s foreign exchange hedging requirement rules also mean that currency mismatch risks among non-bank corporations are more manageable now.
Note that despite all the talk about foreign capital outflows, foreigners are still net buyers of Indonesia government bonds in the year-to-date (about US$5.5 billion). Even after accounting for the US$0.3 billion net outflows from the equity market this year, most foreign investors are appearing to stay put. It is important to see BI’s change of perspective on the rupiah though, as this could be the first step to restore confidence on the unit among local businesses. Further moderation in investment growth would only hurt GDP growth potential in the medium term.
