Responding to Rupiah Rate

ANTARA FOTO/SIGID KURNIAWAN

An employee counts US dollar banknotes at a money exchange outlet in Kwitang, Central Jakarta, on Tuesday. The rupiah depreciated against the US dollar to Rp 14,052 per US dollar at closing on Tuesday (8/5/2018).

The rupiah exchange rate against the US dollar weakened to Rp 14,036 per US dollar according to the Jakarta Interbank Spot Dollar Rate (Jisdor), despite good macro indicators.

Bloomberg said the rupiah exchange rate on the spot market weakened to Rp 14,003 to the US dollar on Monday (7/5/2018). This is the lowest exchange rate in the past 28 months.

On the same day, the Central Statistics Agecy (BPS) announced 5.06 percent economic growth in the first quarter, a slight increase compared to 5.01 percent in the same period last year. However, it was lower than the 5.19 percent growth recorded in the final quarter of 2017.

Pressure on the domestic economy has increased after the West Texas Intermediate oil price, the international oil reference price, surged to US$70.56 per barrel. The surge has affected the US bond yield and triggered foreign capital outflow.

For Indonesia, the weakening rupiah exchange rate is a serious problem that requires a proper response. The government cannot continue to rely on explanations that the depreciation was merely due to external factors, such as the US bond yield surge and the Federal Reserve’s planned interest rate hike. Such external factors will always exist.

The rise in the US dollar exchange rate and oil prices will pressure Indonesia’s balance of payments. The government has decided not to raise the prices of Premium and diesel fuels, at least until the end of this year, and there has been talk that the government may continue to subsidize fuel. If this plan is implemented, the government will have less latitude in its spending budget.

The rupiah depreciation could be positive if it is managed and the economy is driven by exports. However, export performance remains below expectations. Incentives for export products that use local raw ingredients and restricting imports of products that can be produced locally will strengthen our foreign exchange reserves.

A proper response is highly critical at the present time. It is inappropriate for us to act as though our economic foundation is perfectly fine and that the rupiah’s weakening is temporary and will not disrupt the economy. In actuality, the rupiah depreciation will weaken purchasing power, considering that we import a significant amount of industrial raw materials and raw food ingredients.

Two response options have emerged: Bank Indonesia can either commit to market intervention or increase its reference interest rate to hold off capital outflow among foreign investors.

Bank Indonesia has prepared itself and strengthened its foreign exchange reserves through measures such as signing swap arrangements with Japan, China and Australia to protect local currencies. On the other hand, increasing the interest rate could disrupt economic growth.

For the business world, it will be important to observe signs that the government is capable of bringing everything under control and is able to launch the proper response at the proper time. Recognizing such signs is important to prevent psychological effects that may ensue in unpredictable impacts.