Paying Attention to the Domino Effect of Rupiah Weakening

The government and monetary authorities need to anticipate the weakening of the rupiah and also the threat of conflict in the Middle East.

KOMPAS/PRIYOMBODO

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

Weakening of the rupiah has the potential to have a domino effect on the national economy. The government and monetary authorities need to immediately prepare a number of policy steps to maintain rupiah stability amid the increasingly heated threat of conflict in the Middle East.

The stability of the exchange rate of the Rupiah against the US Dollar is a hope for us all. Unfortunately, maintaining the stability of the exchange rate is not easy. In reality, Indonesia has experienced a depreciation process of the Rupiah exchange rate, so that currently the exchange rate has reached a psychological level of Rp 16,000 per US Dollar.

Based on data from Jakarta Interbank Spot Dollar Rate (Jisdor), the exchange rate of the rupiah against the US dollar at the close of trading on Friday (19/4/2024) was Rp 16,280 per US dollar, weaker than the previous day's close of Rp 16,177 per US dollar. This position is the lowest since April 2020.

Throughout the first quarter of 2024, the Indonesian rupiah currency has continued to face pressure and depreciated by approximately 2.6 percent. In fact, the weakening of the rupiah against the US dollar has persisted until April.

The condition is not only experienced by Indonesia. Currency depreciation is also experienced by many other countries in the world. In Asia, for example, the majority of currencies have weakened against the US dollar. The Korean won recorded the deepest depreciation at 1.25 percent, followed by the Philippine peso which weakened by 0.59 percent, and the Taiwan dollar that weakened by 0.44 percent. Furthermore, it was also followed by a 0.20 percent depreciation of the Singapore dollar, a 0.15 percent depreciation of the Thai baht, a 0.09 percent depreciation of the Malaysian ringgit, and a 0.04 percent depreciation of the Chinese yuan.

If observed, there are a number of factors that trigger the weakening of the rupiah exchange rate against the dollar, both externally and internally. Externally, the weakening of the rupiah is influenced by global sentiment. This sentiment is the release of fundamental data from the US that indicates the US economy is still resilient, thus lowering expectations of a benchmark interest rate cut.

The weakening of the rupiah occurred after several US Central Bank officials reiterated that they would maintain the high interest rate policy for a longer time. Chair of The Fed Jerome Powell emphasized that further time is still needed before deciding on an interest rate cut. In a panel discussion at the Washington Forum, on April 16 2024, he stated that the US economy had not yet reached the central bank's inflation target of 2 percent.

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

Apart from that, the weakening of the rupiah is also increasingly overshadowed by geopolitical tensions in the Middle East region following Iran's attack on Israel on Saturday (13/4/2024). The weakening of the rupiah occurred in tandem with the depreciation of almost all countries' currencies due to the stronger risk-off sentiment in the market and demand for safe assets. i>haven is like the US dollar which is increasing.

From the internal or domestic side, the weakening of the rupiah against the dollar is also triggered by seasonal factors or patterns where dividend and coupon payments to non-residents as well as principal payments on foreign debt will increase every year. second quarter of each year.

Domino effect

Although the weakening of the rupiah exchange rate is considered still under control and not as dangerous as other countries' currencies, the situation of the US dollar's exchange rate increase remains risky. A depreciation of the rupiah that breaks through the psychological level can trigger negative sentiment that will further pressure the rupiah.

In general, there are several domino effects that occur when the value of the rupiah falls. In the business world, they are concerned that this weakening of the rupiah will affect their competitiveness, especially those in the manufacturing sector.

Experience in many countries has proven that when there is a weakening of currency, several industries such as the food and beverage industry, textile industry, and others will be affected. The increase in the value of the US dollar currency, for example, will directly cause the price of raw materials to increase as well.

In Indonesia, the need for raw materials to produce food and beverage industries is mostly imported. When the price of raw materials goes up, the production cost will also increase. As a result, the selling price of the products will also increase, even to an uncompetitive level in the market.

In addition, the weakening of the rupiah and the increase in the exchange rate of the US dollar will sooner or later lead to increased logistics costs. For the product delivery process, there will certainly be an increase in transportation costs. For products exported abroad, they will undoubtedly have to pay higher transportation costs.

The strengthening of the US dollar also puts pressure on Indonesia's trade balance. Indonesian export goods measured in US dollars will become more expensive for importing countries, thereby reducing international demand. If demand for exports decreases, it could have a negative impact on the national trade balance, weakening the rupiah exchange rate even further, and ultimately reducing economic growth.

Also read: Rupiah Falls 303 Points, Impact on Industrial Competitiveness is a Concern

KOMPAS/TOTOK WIJAYANTO

Loading and unloading activities of containers onto and off cargo ships at the New Priok Container Terminal 1, North Jakarta, on Friday (23/2/2024). The Central Statistics Agency noted that Indonesia's export in January 2024 was 20.53 billion US dollars, a decrease of 8.34 percent compared to the previous month. Meanwhile, the value of imports in January 2024 was 18.51 billion US dollars, a decrease of 3.13 percent compared to December 2023.

The domino effect of the weakening rupiah will inevitably decrease the demand and purchasing power of the Indonesian community. Many cases have proven that if the currency value depreciates, the increase in prices of imported products can raise local inflation. Currency depreciation can increase inflation as the price of imported goods becomes more expensive. The potential increase in prices of imported goods can spread to other sectors in the economy.

Not only inflation, but the domino effect of the weakening of the rupiah against the US dollar also has the potential to increase the number and obligations of the government or private sector in paying debts. The depreciation of the rupiah currency will undoubtedly make the burden of debt repayment more expensive.

Rupiah depreciation can also potentially increase credit risk because companies that have debt in dollars will face higher debt service costs in rupiah. This will make it difficult for corporations or the government to pay back foreign debts.

For your information, Indonesia's foreign debt as of February 2024 is recorded at $407.3 billion US dollars or equivalent to IDR 6.629 trillion (assuming an exchange rate of IDR 16,280). Out of that figure, the government's foreign debt position is recorded at $194.8 billion US dollars or IDR 3.170 trillion, while the private sector's foreign debt is recorded within the range of $197.4 billion US dollars.

According to the economic sector, the largest private foreign debt comes from the processing industry sector; financial and insurance services; procurement of electricity, gas, steam/hot water, and cold air; as well as mining and excavation with debt shares reaching 78.3 percent of the total private foreign debt.

Meanwhile, as of the end of March 2024, Indonesia's foreign exchange reserves stood at 140.4 billion US dollars, down from the previous month's 144.0 billion US dollars. The foreign exchange reserves are equivalent to financing 6.4 months of imports or 6.2 months of imports plus payments of the government's external debt. In other words, the foreign exchange reserves are still above the international adequacy standard of around 3 months of imports.

On the investment side, the strengthening of the dollar can also affect the flow of foreign investment into Indonesia. Foreign investors have the potential to seek profits from differences in interest rates and differences in currency exchange rates. When the dollar strengthens, foreign investors have the potential to withdraw their investments from emerging markets such as Indonesia to invest in dollar-denominated assets that provide better returns. This could have an impact on capital leaving Indonesia which could cause further depreciation of the rupiah and lower share and bond prices in the local financial market.

Policy steps

Facing the weakening of the rupiah, the government and Bank Indonesia as the central bank that regulates monetary policy in Indonesia have declared their commitment to maintaining rupiah stability in anticipation of the impact of uncertainty over the decrease in the United States' policy interest rate or Fed Fund Rate and rising geopolitical tensions in the Middle East.

Bank Indonesia Governor Perry Warjiyo stated that several important steps have been taken to maintain the stability of the rupiah after the Eid holiday, as well as in the midst of escalating conflicts in the Middle East and the dynamics of the US economy. The BI Governor ensures that the stability of the rupiah remains maintained through foreign exchange interventions and other necessary measures.

Also read: Save Rupiah, Exporters Asked to Save Maximum Dollars at Home

KOMPAS/MAWAR KUSUMA WULAN

Bank Indonesia Governor Perry Warjiyo spoke to the press after attending a limited meeting led by President Jokowi and attended by Vice President Ma'ruf Amin on Tuesday (April 16th, 2024). The limited meeting discussed the global situation development triggered by the escalation of conflicts in the Middle East.

There are a number of efforts made by BI to stabilize the rupiah exchange rate, including by maintaining the balance of foreign currency supply-demand in the market through triple intervention, especially in spot and >domestic non-deliverable forward.

Apart from that, BI will also carry out market-friendly management of foreign portfolio flows, including monetary operations that are promarket and integrated with money market deepening to support the external resilience of the Indonesian economy. BI will also increase the attractiveness of rupiah assets to encourage foreign capital inflows, such as through the attractiveness of Bank Indonesia Rupiah Securities and hedging costs.

Meanwhile, Finance Minister Sri Mulyani stated that state-owned enterprises should refrain from making large-scale purchases of dollars for imports or debt payments in order to avoid additional pressure on the rupiah. Natural resource exporters are also reminded to comply with repatriation rules for dollar earnings to support the country's foreign exchange reserves. (KOMPAS RESEARCH)