The rupiah, as measured by the Jakarta Interbank Spot Dollar Rate (Jisdor), dropped to a multiyear low on Thursday (28/6/2018), though still holding well above the low of Rp 14,728 per US dollar hit on Sept. 29, 2015.
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ANTARA FOTO/WAHYU PUTRO A
A teller counts US dollars at the head office of Bank Mandiri, Thursday (28/6/2018). Bank Indonesia’s Jakarta Interbank Spot Dollar Rate (Jisdor) showed the rupiah weakening to Rp 14.271 per US dollar, the lowest level in more than three years, amid negative market sentiment and unsupportive fundamentals.
The government is under pressure to improve Indonesia’s current account as the rupiah weakened to Rp 14,271 per US dollar and the Indonesian Composite Index closed at 5,683 points on Thursday.
The rupiah, as measured by the Jakarta Interbank Spot Dollar Rate (Jisdor), dropped to a multiyear low on Thursday (28/6/2018), though still holding well above the low of Rp 14,728 per US dollar hit on Sept. 29, 2015.
This year, the national currency had weakened to Rp 14,205 per US dollar on May 24, but then regained some strength when Bank Indonesia raised its reference rate by 25 basis points to 4.75 on May 30.
The government has often said cited external factors in explaining the rupiah’s weakening, including the US Federal Reserve increasing its reference rate to prevent the domestic economy from growing too fast. Another factor is US President Donald Trump’s policies of increasing import tariffs and limiting Chinese investment in the US.
These two factors have led to the weakening of emerging market currencies and affected the global financial market amid concerns of a trade war between the US, the European Union and China.
Furthermore, the rupiah is also pressured by the weakening Chinese renmimbi. US policies on China have led to the Chinese central bank loosening its statutory reserve requirement for 17 government and public banks.
Despite Bank Indonesia officials saying the effect of the weaker renmimbi would only be temporary (Kompas, 27/6/2018), we know that fundamental economic transitions are happening right now. Financial market fluctuation and the risk of a trade war must be duly anticipated to prevent adverse short- and mid-term effects on the Indonesian economy.
Trouble surrounding the rupiah’s fluctuating exchange rate will never end unless we overcome the fundamental problem, namely our current account deficit. Such a deficit has been ongoing since 2012, and this has led to the rupiah’s continuous weakening. This year, the deficit is expected to be 2.1-2.3 percent of the gross domestic product, higher than last year’s 1.7 percent. The rupiah’s weakening increases the risk of a rising current account deficit.
The current account reflects foreign exchange supply and demand in the international trade of goods and services. If the current account is in deficit, a country requires financial inflows to cover the deficit. This fundamental factor is a point of consideration for investors, apart from the ability to curb inflation.
Indonesia’s current account deficit is structural, as reflected in the huge dependence on exports of commodities and mining products.
We have the potential to structurally improve our current account by continuously improving the diversity and quality of our exports and attracting foreign direct investment, among other means. To do this, we need clear mid-term and long-term policies and strategies and consistent leaders.
We put our hope in the central bank to curb the rupiah’s volatility in the short run. The central bank must increase its reference rate, despite the risk of rising banks credit interest rates.
