JAKARTA (TheInsiderStories) – Rupiah weakening going further to 15,133 again the US dollar on Thursday (04/10). Several Observers assessed this happened due to the lack of coordination between the government and Bank Indonesia (BI) to reduce the negative sentiment from the global economy.
The weakest since the Asian financial crisis in July 1998.
As we know, BI has raised the BI 7 Day Reverse Repo Rate (BI-7DRRR) by 125 basis points since the Governor Perry Warjiyo took office in May 2018 to 5.75 percent. At the same time, government also issued policy measures to counter the weakening Rupiah.
But the global factor still dominant influence the financial market. On the other hand, foreign exchange reserves have also been drained a lot to stabilize the Rupiah.
Observers asserted lack coordination between the government institution cause of continued weakening of the Rupiah.
“The problem is in the economic team, including the minister of finance who is slow to respond,” INDEF economist Bhima Yudhistira said.
He gave an example of a policy that was slow to respond by the ministry of finance, namely the matter of controlling imports only touching insignificant consumption goods. The effect of Article 22 Income Tax imposed on certain business entities, which conduct trade activities in exports, imports and re-imports, only 5.5 percent of the total non-oil and gas imports.
According to him, it should be the 10 largest imported goods, including controlled steel. Because the dumping steel by China drained foreign exchange significantly.
“Miss coordination is too severe. Where is the monetary path, fiscal path in the other direction. Finally creating distrust in the eyes of investors,” said Yudhistira.
By looking at global turmoil and weak economic fundamentals, the Rupiah is projected to continue to undergo correction until 2020. The government and BI must improve coordination and undertake short-term technical measures.
The government also must be able to reduce the current account deficit through controlling the import of the 10 biggest goods through an increase in import duties and anti-dumping policies.
Another step that can be taken is to provide greater incentives and guarantee preferential exchange rates for entrepreneurs to immediately convert export proceeds to the Rupiah.
“At present, only 13 percent of export revenues has been converted into rupiah, the rest is in the form of foreign exchange,” he added.
Another fast way, said the observer, by reducing the tariff of export levies on crude palm oil from the current price of $50 per ton for raw and $30 per ton for processed, to $20 per ton.
Palm oil is the largest non-oil and gas contributor. The existence of barriers to import duties to India is a problem that makes CPO export performance not optimal.
Meanwhile, former Finance Minister Chatib Basri said there’s one more policy action that the government can take to reduce the volatility that is raising the price of fuel. Basri, however, insisted that the recent slump is not an indication of an impending crisis.
“Our current account deficit widened largely because the deficit in oil and gas,” said Basri, adding raising prices of fuel would reduce demand for imported oil.
Furthermore, Economist Faisal Basri asserted that the main cause of the weakening of the Rupiah was related to the release of foreign funds of up to US$20 billion from Indonesia in 2017. The fund was a repatriation of the profits of foreign companies in Indonesia.
“What they brought back was $20 billion, so the source of the rupiah deteriorated not because imports rose, yes that was the cause, oil imports also rose, that’s the cause, but the main cause was the repatriation of foreign companies’ profits in Indonesia,” he reiterated.
He explained, the repatriation rate was far greater than the oil and gas import deficit of $11 billion. He also advised the government to immediately make strict rules regarding the repatriation limit.
If 25 percent of profit or foreign profits are required to remain in Indonesia it will greatly help stabilize the rupiah in the global market. He stated, “Reinvest in Indonesia, only 5 percent or around $5 billion.”
The figure, he continued, is even far greater than the savings made by the government, namely the increase in import duties of several commodities and the tax increase of import tax Article 22. In addition, Basri explained that the money would remain in Indonesia and would benefit the foreign company itself.
He hopes the government can immediately take a stance on these conditions. Especially at this time the distribution of profits or dividends is in sight.
“It’s already starting again, the dividends are paid quarterly, this has been entered into the fourth quarter, paid. We must immediately offer them (foreign companies) so that they can at least hold back (not bring home the profits) for a while ,” said Basri.
Commeting on the Rupiah condition, BI’s Governor Perry Warjiyo stated Indonesia’s current economic conditions differed from the conditions when hit by the monetary crisis in the 1997-1998 range. While the Senior Deputy Governor Mirza Adityaswara said the Rupiah is still at safe level and the fall is broad-based in other currencies.
He urged the domestic financial system remains stable as seen in the level of capital adequacy ratio which is above 20 percent. Adityaswara said the domestic supply and demand dynamics of the greenback is still normal.
While, Finance Minister Sri Mulyani Indrawati added the slump is largely due to external factors and the government had taken a series of measures to reduce the volatility.