The government must move quickly to deal with the weakening of the rupiah. Due to external factors, government steps that are too slow can trigger speculation.
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JAKARTA, KOMPAS — The government must move quickly to deal with the weakening of the rupiah. Due to external factors, government steps that are too slow can trigger speculation.
These external factors are part of a plan by the United States’ central bank, the Federal Reserve, to raise benchmark interest rates and US plans to further increase import tariffs on China. The negative sentiment will worsen with the financial crisis in Argentina and Turkey, which market participants fear may spread to other developing countries.
The rupiah exchange rate against the US dollar fell deeper to Rp 14,767 on Monday. Since the reference rate of the Jakarta Interbank Spot Dollar Rate was put into effect on May 20, 2013, this exchange rate has been at its lowest.
In the cash market, referring to Bloomberg data on Monday night, the rupiah was trading at Rp 14,821 per US dollar. According to CEIC data, the previous low was on June 18, 1998, when the rupiah hit Rp 14,900 per US dollar.
"Deflation of 0.05 percent in August should have a positive sentiment on the market. However, it will not happen because external factors have greater influence," PT Bank Central Asia Tbk economist David Sumual told Kompas in Jakarta on Monday.
The step to overcome the weakening of the rupiah in the short term is to convert foreign exchange proceeds from exports into rupiah. The government can provide incentives for exporters who convert their foreign exchange.
Based on Bank Indonesia (BI) data, more than 90 percent of exporters have brought foreign currency into the country. However, only 15 percent are converted into rupiah.
Another step, according to David, was to accelerate the reduction of imports that were not needed. "If it takes too long to implement, importers can speculate due to the absence of clarity on which sectors will be reduced or substituted. Importers can buy US dollars to import raw material as stock," he said.
On Monday, President Joko “Jokowi” Widodo summoned a number of ministers and institutional leaders to the Presidential Palace in Jakarta. After an hour-long closed meeting, Finance Minister Sri Mulyani Indrawati said the government had prepared a strategy to deal with the negative impact of the global economic turmoil, including the weakening of the rupiah against the US dollar. "The steps by the government together with the monetary authority and the Financial Services Authority (OJK) will be increasingly synergized," she added.
The government, BI and the OJK are expected to be able to adjust to each other with regards to the market conditions for securities, portfolios, exchange rates, and real sector dynamics such as exports and imports.
Negative sentiment
Sri Mulyani added that the government would focus on reducing the negative sentiment of the current account and the trade balance, which was in a deficit. In the second quarter of 2018, the current account deficit was US$8 billion. The deficit of the trade balance from January to July 2018 was $3.09 billion.
"We, together with the trade and industry ministers, will look at the composition of commodities that have been imported, which do not add much value to the economy," she said.
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