Indonesian financial market keep sagging amid the various negative news from global and domestic - Photo: Special

JAKARTA (TheInsiderStories)Bank Indonesia‘s Senior Deputy Governor Mirza Adityaswara on Tuesday (3/7) saw the current account deficit (CAD) is seen around 2.5 per cent to 3 per cent of gross domestic product (GDP), possibly putting more pressures to the rupiah.

The estimate is higher than CAD in the first quarter of this year that reached US$5.5 billion or 2.15 per cent of GDP. However, he ensured Indonesia’s economy is not in the overheating condition even though the country recorded higher CAD in the second quarter of this year.

The higher CAD in the second quarter of this year is triggered by the increase of imports that made Indonesia recorded US$1.52 billion in trade deficit in May 2018. The country booked $2.38 billion trade deficit from January to May 2018. This deficit makes the outflow of foreign exchange from Indonesia much larger than the incoming foreign exchange.

“We were saying that Indonesia is a CAD country, meaning our country needs foreign exchange to enter Indonesia to patch it. On one side government will push export but it can not be in a quick time,” he said as quoted by local media.

The widen current account deficit put more pressure on the rupiah currency against U.S Dollar. Investors concern over Indonesia’s current account deficit as it reflects foreign reserve from trade. Foreign reserve from the trade is more sustainable to support exchange rate rather than capital flows in the capital market.

Rupiah weakened to Rp14,420 per US$1 at 14.13 WIB in the spot market, the lowest since 2015. According to the Jakarta Interbank Spot Dollar Rate (JISDOR), the rupiah also weakened to Rp14,418 per US$1 today, decreased from the previous day’s close of Rp14,331 per US$1. In total, rupiah weakened 6.16 per cent since the beginning of this year.

Bank Indonesia’s move to increase its key interest rate three times this year is apparently not strong enough to maintain rupiah against US Dollar. Bank Indonesia increased its key interest rate by 50 basis points to 5.25 per cent on Friday (29/06).

The central bank also raised its deposit facility rate by 50 basis points to 4.5 per cent, and its lending facility rate by 50 basis points to 5.75 per cent. The central bank also increased the interest rate in May 17, 2018 and May 30, 2018 as much as 25 basis points.

In addition to the internal factor of higher current account deficit, external factor also affects rupiah currency against US Dollar. One of the main factor is the U.S’s Federal Reserves (Fed) that likely to raise its benchmark rates for twice or more in this year. The US central bank seems also will increase the interest rate two or three times next year.

Meanwhile, the European Central Bank (ECB) loose monetary policy and is seen less aggressive to raise the interest rate this year put pressured on Euro. As a result, investors choose US dollar as hedging asset that made this currency stronger than other currencies, including rupiah.