Various Industrial Sectors Pressured by Rupiah Depreciation

This industrial sector has to pay more for raw materials because it uses US dollars.

KOMPAS/PRIYOMBODO

The rupiah exchange rate against the US dollar throughout this week continued to fluctuate above the level of IDR 16,000.

JAKARTA, KOMPAS — The phenomenon of rupiah depreciation is hitting a number of economic sectors that still have to rely on imported raw materials, but sell them to the domestic market in rupiah. Players in this industry have to pay more for raw materials because raw material purchase transactions use US dollars.

The Vice President for Industry and Regional Research of PT Bank Mandiri (Persero) Tbk, Dendi Ramdani, said that there are several economic sectors that are directly affected by the depreciation of the rupiah. They are economic sectors whose production costs for their raw materials are increased due to still having to import them. On the other hand, their product sales are in the form of rupiah.

"They buy imported raw materials and then process them into products. Then sold in rupiah. "Production costs could increase because the rupiah exchange rate weakens when buying raw materials," said Dendi when contacted on Tuesday (23/4/2024).

KOMPAS/TOTOK WIJAYANTO

Exhibition atmosphere for wood machinery and furniture manufacturing components Ifmac & Woodmac at the Jakarta International Expo, Kemayoran, Jakarta, Friday (22/9/2023).

He explained that the industrial sector that will be directly affected is the pharmaceutical industry. This is because around 90 percent of raw materials for the pharmaceutical industry still need to be imported as domestic raw materials cannot yet meet the needs of the pharmaceutical industry.

In addition, there is an upstream chemical industry. This industry requires production materials in the form of naphtha, a type of oil that can be processed into downstream chemical products. Naphtha can be processed into various downstream products in the chemical industry, ranging from packaging plastics, children's toys, construction plastics, to automotive component plastics.

Nevertheless, all naphtha used as raw material for chemical industries still have to be imported from the Middle East. Domestic oil companies do produce naphtha, but it is supplied to be processed into subsidized fuel.

There is also the possibility that the production price will translate into an increase in the selling price of the product.

Another industry that will be directly affected by the weakening of the rupiah exchange rate is the upstream textile industry. In the process of converting yarn into fabric, many of the raw materials are still imported. So far, the domestic upstream textile industry still has many that cannot produce the specific raw materials needed for intermediate and downstream industries.

The production of cars will also be affected by the weakening of the rupiah. There are still many automotive components that must be imported, ranging from steel to electronic machinery.

A similar fate is also experienced by the electronics industry. The raw materials for the electronics industry still need to be imported because they are not yet available domestically.

Dendi explained that the depreciation of the rupiah will immediately increase the production costs of various industries. Furthermore, it heavily depends on each industry's response, such as what efficiency measures are taken to keep product prices competitive. It is also possible that the production costs may transmit into an increase in the selling price of the product.

Also read: Rupiah Exchange Rate Weakens, Prices of Goods May Rise

KOMPAS/TOTOK WIJAYANTO

Imported cattle from Australia were unloaded from the Gelbray Express ship at the Non-Petroleum Terminal of Tanjung Priok Port in Jakarta on Thursday (21/3/2024). The government, through PT Rajawali Nusantara Indonesia or ID Food, imported 2,350 live cattle from Australia to meet the demand for beef during Eid al-Fitr in 2024.

Industrial structure

Contacted on Tuesday, Executive Director of the Center of Reform on Economics (CORE) Mohammad Faisal said that the depreciation of the rupiah would put pressure on the domestic manufacturing industry. This is because the manufacturing industry still relies heavily on imported raw materials.

Quoting data from the Central Statistics Agency (BPS), in the period of January-March 2024, the total imports of raw materials and auxiliaries reached 40.79 billion US dollars or 72.81 percent of the total imports which amounted to 54.89 billion US dollars.

Faisal stated that the weak upstream industry requires the intermediate and downstream industries to still import raw materials. When the industrial structure is strong, downstream expansion or the supply of raw materials from upstream and intermediate industries should be enjoyed by the downstream industry.

Previously, Minister of Industry Agus Gumiwang stated that they are accelerating the steps of deepening, strengthening, or spreading industrial structures aimed at immediately increasing the import substitution program.

"This needs to be supported by tightening the provisions on the Domestic Component Level (TKDN) to anticipate excess trade diversion from other countries to Indonesia. "This means that ministries/agencies must be more disciplined in procuring goods and services using domestic products," said Agus.

Also read: Get Ready for a High Cost Economy in 2024