Market Update: Lack of U.S Dollar Weakens Indonesian Rupiah

Bank Indonesia governor Agus Martowardojo - Photo by the Central Bank

JAKARTA (TheInsiderStories) – The weakening trend in the Indonesian currency rupiah against the U.S Dollar has occurred since several weeks ago. Governor of Bank Indonesia (BI) Agus Martowardojo said, the psychological level for the local currency at the level of Rp14,000 and the Central Bank will take

On Wednesday ((09/04), rupiah in the spot market is priced at Rp14,075 against U.S dollar. The rupiah weakened 0.21 percent compared to the previous day’s close. At the same day the Jakarta Composite Index closed 2.31 percent higher to 5,907.93 from the previous day.

For the governor, the weakening of the rupiah against the U.S dollar is a natural thing caused the strengthening of Uncle Sam’s currency against almost all world currencies. Furthermore, Martowardojo said the Central Bank will keep the volatility within reasonable limits.

Amid rising global challenges today, He added, BI is in the middle and will take decisive steps to ensure the creation of economic stability. Global challenges, especially the cycle of rising interest rates in the U.S, rising world oil prices, as well as rising geopolitical risks as a result of increasing US-China trade dispute tensions and the cancellation of the U.S-Iran nuclear agreement have resulted in the strengthening of the US dollar against all world currencies, including the Rupiah .

He explained, during May 2018 (month to date) the Rupiah weakened 1.2 percent, Thai Bath 1.76 percent, and Turkish Lira 5.27 percent. Meanwhile, throughout the year 2018 (year to date) Rupiah weakened 3.67 percent, Philippines peso 4.04 percent, India Rupee 5.6 percent, Brazil Real 7.9 percent, Russian Rubel 8.84 percent and Turkish Lira 11.42 percent.

He stressed it, the weakening of the rupiah in recent weeks is no longer in line with Indonesia’s current economic fundamentals. Related to this, and seeing the potential challenges from global conditions that could potentially disrupt the sustainability of Indonesia’s economic growth in the medium to long term, BI will firmly and consistently direct and prioritize monetary policy on the creation of stability.

Considering this, BI has considerable space to adjust the policy rate (7 Days Reverse Repo). The policy responses will be executed consistently and preemptively to ensure the sustainability of stability.

On the other hand, He said, BI will also consistently encourage effective and efficient market mechanisms, so that liquidity availability in both the foreign exchange and money market markets is well maintained.

Monetary operations in the foreign exchange market will continue to be done to minimize exchange rate volatility so that confidence of economic actors can be ensured, adde by the governor. Monetary operations in the money market will continue to ensure adequate availability of rupiah liquidity and sustained interest rate stability in the money market, in a corridor in line with BI’s monetary policy stance.

Collaboration with related authorities and the financial industry, especially associations, will be further strengthened to deepen and streamline price discovery in foreign exchange and money market markets, including through the addition of instrument variations, strengthening of financial market infrastructure, and strengthening the credibility of market reference rate.

Coordination with the Government will be further strengthened to ensure adequate inflation of targets, ensuring effective structural reforms to strengthen current account and capital account balance structures, as well as other structural policies to improve economic competitiveness

Commenting on the weakening rupiah, Coordinating Minister for Economic Affairs Darmin Nasution rated the rupiah weakened cause there is a potential imbalance between supply and demand in the foreign exchange market.

He warned if the financial regulator dissolved late then the country have the potential for flaws of foreign exchange. Nasution said, in these circumstances the choice of the central bank is not much just to let the exchange rate weaken or interest rates are raised.

President Joko Widodo himself assessed the weakening of rupiah experienced by all countries due to the issue of trade war between U.S and China and the rise in interest rates in the United States. The government, he said, continues to coordinate with the central bank to minimize pressure on the rupiah.

In the meantime, Binaartha Securities analyst Reza Priyambada argues, the strengthening of the rupiah tends to be restrained because there is still a chance of re-appreciation of the U.S dollar. Not only that, the forecasts of an improving U.S economy and an assessment of the economic slowdown in the European Zone give a boost to the pace of the US dollar. As a result the rupiah was increasingly crashed.

Head of Economics and Research Finance and Corporate Service of UOB Indonesia, Enrico Tanuwidjaja also rated the strengthening U.S Dollar occurs against almost all major currencies such as Euro, Australian Dollar, Singapore Dollar. Internally, according to him quite well, what may be feared is the payment of dividends and foreign debt.

The foreign debt itself is divided into two, government debt and private debt. The concern that may occur in the community is whether with the current debt conditions and the strengthening of the American dollar, whether the fundamental conditions will be disrupted.

Tanuwidjaja sees resilient in terms of economy, the current conditions are much more solid than 10 or 20 years ago. This can be seen from the investment grade rating given by three agency ratings.

From the capital market side, Tanuwidjaja explained that there are still many who view Indonesia as an emerging market, so even if there is net sell it does not mean directly exchanged to the dollar, but there is a possibility to be transferred to the bond market.

In line with Tanuwidjaya, Head of Center for Economic and Public Policy Studies at Gadjah Mada University, Tony Prasetiantono noted the level of Rp14,000 is a psychological level that makes people uncomfortable, because it reminds the crisis of 1998, so it must be kept not exceeded too far.

According to him, BI should not think to solve this problem by intervention, given that foreign exchange reserves are declining significantly. Raising interest rates is an option that must be taken immediately.

He believed, if late responds it will incur additional costs such as depletion of foreign exchange reserves, which will eventually make the market more worrying. Prasetiantono acknowledged that the increase in rupiah interest rates is not immediately will make the rupiah strengthened, but at least can reduce the burden of foreign exchange reserves.

Indonesia still has a defense in the form of Chiangmai Innitiative. Based on Bank of America Merrill LynchBank data, BI has a $22 billion buffer for defending the rupiah before alarm bells ring about its foreign reserves.

In Tuesday (08/05) announcement, Indonesia forex reserves fell to $124.9 billion from $126 billion in April, as BI continued to intervene in the market to stabilize the rupiah against the increasingly stronger US dollar.

TheInsiderStories expects that in order to stabilize the financial market, BI will continue taking necessary measures by utilizing all of the tools at its disposal, which include raising interest rate. At the meantime the coordination among the financial regulator are needed to form the right fiscal and monetary policy for the country.