Confusing Erick Thohir's Directions and BUMN's "Dilemma" to Protect the Rupiah

The position of BUMN is in a "dilemma" between helping to reduce the weakening of the rupiah while maintaining business operations and public services.

HUMAS KEMENTERIAN BUMN

State-owned Enterprise Minister Erick Thohir delivered a number of presentations during a working meeting with the DPR's VI Commission in Jakarta, on Tuesday (19/3/2024).

In the midst of increasing geopolitical uncertainty due to the escalation of conflict in the Middle East, ministers in Joko Widodo's cabinet momentarily differed in their opinions about strategies to anticipate the impact of economic turmoil and weakening of the rupiah in the country.

The reason is the statement by the Minister of State-Owned Enterprises Erick Thohir in response to the weakening condition of the rupiah. In his official statement, Thursday (18/4/2024), Erick asked BUMN whose raw materials come from imports and a large portion of foreign debt to "optimize the purchase of US dollars in large quantities and in a short time".

Also read: Reduce the Impact of Dollar, Business World Urged to Use Local Currency

The state-owned enterprises referred to include PT Pertamina (Persero), PT Perusahaan Listrik Negara (Persero), state-owned pharmaceutical companies, and MIND ID (Mining Industry Indonesia).

Erick's instruction to state-owned companies is to respond to the weakening of the rupiah against the US dollar due to the monetary tightening policy of the United States and the escalation of conflict in the Middle East region. Erick predicts that if geopolitical tensions do not decline, the exchange rate of the rupiah is potentially reaching more than Rp 16,500 per US dollar, above the range of Rp 16,000-Rp 16,300 per US dollar as in recent times.

KOMPAS/PRIYOMBODO

Officers serve foreign exchange transactions at PT Valuta Artha Mas in Jakarta, Tuesday (16/4/2024). The exchange rate of the rupiah was recorded to weaken, breaking through the level of Rp 16,200 per US dollar after the 2024 Eid holiday.

The continuously weakening rupiah has impacted the increasing cost of importing raw materials and food due to supply chain disruptions, as well as eroding Indonesia's trade balance.

Therefore, Erick urges state-owned enterprises to take quick measures in minimizing global impacts by reviewing operational costs, capital expenditures, debt that will mature, corporate action plans, and conducting stress tests to assess the condition of state-owned enterprises in the current situation.

Of course, if the dollar situation strengthens, it would not be wise if we buy dollars at high prices.

Not wise

In a press conference to address the current economic conditions following Iran's attack on Israel, Thursday, the Coordinating Minister for Economic Affairs Airlangga Hartarto responded to media questions regarding Erick Thohir's direction.

Airlangga stated that in the current situation where the US dollar is strengthening, state-owned enterprises should be able to hold back on purchasing large amounts of US dollars. "Of course, if the situation is where the dollar is strengthening, it would be unwise for us to buy the dollar at a high price because we need to restrain our need for dollars," he said. He also requested that amidst such a situation, state-owned enterprises can hold back on consumer imports.

KOMPAS/PRIYOMBODO

The atmosphere at the currency exchange of PT Valuta Artha Mas in Jakarta was bustling on Tuesday (16/4/2024). Referring to the Jakarta Interbank Spot Dollar Rate (Jisdor), Bank Indonesia's reference exchange rate on April 16, 2024 was Rp 16,176 per US dollar. The weakening of the exchange rate of the Indonesian rupiah was caused by several global developments during the Lebaran holidays.

Similarly, at the same event, Deputy Finance Minister Suahasil Nazara urged SOEs to restrain from unnecessary imports. "I am very happy because SOEs are also controlling (the weakening of the rupiah). However, if (import) is needed, please proceed. But if it is consumptive in nature, we should hold it back," he said.

Amidst the weakening of the Indonesian rupiah against the US dollar, actions to "buy" US dollars or exchange Indonesian rupiah to US dollars can have an impact on the further weakening of the exchange rate of the rupiah. The act of disposing of rupiah actually increases the demand and need for US dollars in the market, thus strengthening the US dollar.

Also read: Rupiah Reaches IDR 16,240, Two Monetary Policy Options Open

The next day, on Friday (19/4/2024), Erick Thohir denied having asked state-owned companies to "hoard" US dollars amid the weakened rupiah condition. According to Erick, his directive to state-owned companies is to buy US dollars optimally, in a measured manner, and as needed.

He asked state-owned enterprises to control unnecessary spending and imports, as well as not to buy and hoard too many dollars. "So, it's not about hoarding US dollars. The point is, we shouldn't go overboard, we have to be wise in responding to the current rise of the dollar," said Erick.

The position of BUMN is dilemmatic

A BUMN observer from the University of Indonesia, Toto Pranoto, said that BUMNs often face a dilemma in the midst of the weakening rupiah. They are "split" between the mandate to help mitigate the weakening rupiah while still ensuring operational continuity and providing services to the public. This is because in reality, many strategic BUMNs rely on imported raw materials.

Let's take the example of Pertamina, which has to import crude oil for fuel. If Pertamina does not have enough US dollars reserves, they will struggle to import fuel to meet domestic needs. Another example is PT Pupuk Indonesia, which if they do not import fertilizer raw materials, it could disrupt food production in the country.

.

The position of BUMN is often in a dilemma amidst the weakening of the rupiah.

What is avoided is if the action is speculative. "For example, BUMN buys US dollars not for necessity, but because they hope that the depreciation of the rupiah will deepen and they can benefit from buying US dollars when it is strengthening like now," said Toto.

According to him, instead of "buying up" US dollars, state-owned companies should enter into hedging transaction contracts to protect their financial risks against exchange rate volatility. Moreover, in the midst of the current uncertain global financial conditions.

KOMPAS/PRIYOMBODO

Officials are serving the purchase of fuel at the Pertamina gas station 31.128.02 MT Haryono, Jakarta, on Monday (1/4/2024). The consumption of fuel by society during the mudik and Lebaran holiday period is expected to increase.

For example, by carrying out forward contract transactions or making contracts to purchase or import raw materials from now on, with payments made in the next few months in the hope that the rupiah exchange rate will strengthen further.

"In an unstable situation like today, especially since the Russia-Ukraine war, state-owned enterprises are exposed to the possibility of continuously rising operational costs. Therefore, they must protect their financial position and balance the interests of importing raw materials and managing their expenses, which are vulnerable to exchange rate fluctuations," said Toto.

Bank Permata Chief Economist Josua Pardede also suggested that BUMN and private corporations could optimize hedging transactions so that they do not have to "panic" buy US dollars in the midst of the current conditions and this has the potential to further weaken the rupiah.

"Apart from that, importers also need to optimize local currency (LCT) transactions which will also mitigate exchange rate fluctuations, especially with countries that already have agreements with Indonesia regarding LCT," he said.