Rupiah Under Double Pressure

ANTARA FOTO/ADIWINATA SOLIHIN

A resident sees the authenticity of money in an education booth to introduce and love the rupiah in Taruna field, Gorontalo, Gorontalo province, Friday (1/6/2018). Through the Indonesian New Generation (Genbi), Bank Indonesia introduces, educates and invites people to love the rupiah currency.

JAKARTA, KOMPAS – The Indonesian currency has been under double pressure since the beginning of the week. The pressure comes not only from the strengthening US dollar, but also from the weakening Chinese renminbi. These two factors caused the rupiah to fall further.

According to the Jakarta Interbank Spot Dollar Rate (JISDOR) on Tuesday, the rupiah exchange rate fell to Rp 14,163 per US dollar, the lowest in June.

The Bank Indonesia (BI) monetary management head, Nanang Hendarsyah, told Kompas that the rupiah depreciation was caused by two global factors. One was the US Federal Reserve\'s benchmark rate hike in mid-June. The second factor was the negative sentiment resulting from the People\'s Bank of China’s (PBOC) plan to lower the minimum reserve requirement ratio by 50 basis points (bps) for most local banks.

The Chinese central bank’s plan to cut the reserve requirement ratio led to the renminbi’s weakening, which affected most Asian currencies including the rupiah. "The weakening of the renminbi also affected other Asian currencies because the intra-regional trade volume between China and other Asian countries is high," Nanang said in Jakarta.

Nanang estimated that the pressure from the renminbi depreciation would not last long, that it was just a market response to the PBOC\'s plan. Therefore, BI will continue to monitor the market to maintain the stability of the rupiah at its fundamental value.

On Sunday, the PBOC announced it would cut the minimum reserve requirement ratio to increase the liquidity of five state-owned banks and 12 commercial banks. The cut would release about 500 billion yuan (US$77 billion) in liquidity held by the central bank.

The Chinese government is taking steps to anticipate the impact of the US-China trade war on its business activities. The Chinese government has asked the 17 banks to use the increased liquidity resulting from the reserve requirement cut to help local businessmen that may be affected by the US export restriction.

With the added liquidity, lenders have been asked to take part in a debt-for-equity swap scheme to reduce the burden on their borrowers. The debt-for-equity swap is part of a corporate debt restructuring mechanism.

US President Donald Trump announced high import tariffs on steel and aluminum imports from China in March, which has triggered a global trade war.

Switching markets

Fithra Faisal Hastiadi, a lecturer at the University of Indonesia Economics and Business School, said the US-China trade war would force Chinese companies to divert their market from the US to other countries. The Chinese government\'s policy is also intended to increase trade financing for local exporters.

The policy would not immediately result in reducing the imports of industrial raw materials. However, if the trade war continued, Chinese companies would be affected and may have to reduce importing raw materials.

"If the trade war continues, global economic growth will contract by 0.8 percent. The World Bank projected global economic growth of 3.9 percent this year. The trade war will cause the growth [estimate] to fall to 3.1 percent," said Fithra.

Especially for Indonesia, Fithra added, the trade war would cause economic growth to contract by 0.1 percent. The estimated growth contraction had already taken China\'s economic downturn into account.

Fithra estimated that China\'s economic growth this year would be from 6.3 to 6.4 percent, down from last year\'s 6.9 percent.

ANTARA FOTO/SIGID KURNIAWAN

A number of visitors sit behind a banner on the movement of Composite Stock Price Index (JCI) in the Indonesia Stock Exchange, Jakarta, Friday (22/6/2018). The JCI trading last weekend fell by 0.52 points or 0.0089 percent to 5,821.81 level.

Stock exchange

Despite strong early trading, the JCI dropped 33.434 points (0.57 percent) to 5,825.649 at the close of trading. The decline was partly due to investors consolidating amid the pressures on the rupiah.

On Tuesday, foreign investors booked net sales of Rp 453.09 billion, bringing the year’s total net sales to date to Rp 48.55 trillion. Stock market capitalization on the IDX totaled Rp 6.54 quadrillion on Tuesday. The JCI has lost 8.34 percent since the beginning of this year.

The vice president for research at Indosurya Bersinar Securities, William Surya Wijaya, said Tuesday’s decline in the JCI was due to market consolidation amid the rupiah pressures.

However, the JCI still had the potential to grow stronger throughout this week, as BI was likely to raise its reference rate (7-Day Reverse Repo Rate/7DRRR). If the central bank raised the 7DRRR, the rupiah would strengthen, which would contribute to strengthening the JCI.

Meanwhile, research head Kiswoyo Adi Joe at Narada Asset Management said that the JCI’s decline was due to a lack of positive sentiment in the market on Tuesday. In addition, the fall in US stock exchange prices had also contributed to the JCI’s fall.

The 2018 State Budget deficit, which reached Rp 94.43 trillion or 0.64 percent of the gross domestic product (GDP) at the end of May, was the lowest since 2016. According to Kiswoyo, the lower budget deficit could prompt a positive sentiment on the JCI’s movement. "The budgetary policy will be focused on the real sector, one of which is to improve the balance of payments, so that the current account deficit can be reduced," he said.

However, the Fed\'s decision to raise its benchmark interest rate by 25 bps to 1.75-2 percent during the June 13 Federal Open Market Committee’s meeting had contributed to the rupiah’s weakening. "The majority of market participants are also waiting for the decision of the central bank’s Board of Governors meeting later this week," he said.

(HEN/DIM)