Beware of a deeper decline in the Rupiah exchange rate

The world geopolitical situation has also worsened the rupiah exchange rate. Political consolidation is a guarantee of stability.

In the past month, the rupiah exchange rate weakened to a new normal point. Without effective intervention, this weakening of the exchange rate will have a fatal impact on the national economic situation. Moreover, the US Central Bank's behavior could trigger the rupiah to fall further until the end of 2024.

In the second week of April, the rupiah experienced a significant decrease in its exchange rate. On April 9th, the exchange rate of the rupiah dropped above the figure of Rp 16,000 per US dollar. This number became the lowest point for the rupiah in the past 25 years.

This time, the weakening of the rupiah exchange rate is driven by several factors. The first factor that puts pressure on the rupiah exchange rate is the monetary policy of the US central bank. Not only the rupiah, but this "Uncle Sam's" monetary policy also impacts the exchange rate of other countries' currencies.

This is because The Fed's policies, especially those related to benchmark interest rates, can indirectly affect global capital flows.

When the benchmark interest rate is held at a high level, global investors will be more interested in investing in the US due to its alluring returns and relatively small risks. This is what will then cause the value of the US dollar to strengthen.

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

US situation

In the US itself, the macroeconomic situation is not as expected. Previously, The Fed estimated that inflation could be slowly controlled to the level of 2 percent. However, as of last March, the inflation rate in the country still floated around 3 percent.

The Fed's mistaken assumption has led the institution to revise its plan for US monetary policy. At the beginning of the year, The Fed signaled that there would be several rate cuts at least. The hope was that this move would stimulate growth to move more quickly.

However, the inflation situation that is still outside of the target is likely to make The Fed finally postpone its plan to reduce interest rates.

Initially, the policy to decrease interest rates was planned to be implemented in September. However, this plan has been postponed at least until December 2024. It is even possible that the policy for reduction will only be implemented in the first quarter of 2025.

The forecast for The Fed's steps is also in line with the projection of US economic growth. Reuters data, based on achievements in the first quarter of 2024, predicts that US GDP growth this year will be around 2.4 percent with a range of 1-3.1 percent.

This is also reinforced by the International Monetary Fund's (IMF) move to revise its projection for US economic growth in 2024, from the initial 2.1 percent in January to 2.7 percent. This increase is based on improvements in the job market and higher consumer spending than previously expected.

This estimate is quite far above the Fed's expectations. The US Central Bank estimates that US economic growth (non-inflationary growth rate) in 2024 will be not far from 1.8 percent. As a result, the estimates above also give the Fed more confidence that the macroeconomic situation in the US is relatively stable.

This also makes dramatic monetary policy options irrelevant, at least in the near future. The Fed's failure to lower interest rates will keep the US dollar strong. It is not surprising that, for Indonesia, the strong US dollar has the potential to become a factor that further pressures the rupiah.

Also read: Weakening Rupiah Potentially Triggers Price Surge, Entrepreneurs Hope for Intervention

Current account deficit and geopolitical instability

The strong position of the US dollar as an external factor is also exacerbated by Indonesia's current account situation. The latest data shows that in the first quarter of 2024, Indonesia's trade balance had a surplus of 7.31 billion US dollars.

Although continuing the trend, Indonesia's trade surplus is much smaller compared to the surplus in the first quarter of 2023, which was above 12 billion US dollars.

This decreasing trade surplus could be a signal about the current account balance situation. Several institutions, such as Bank Permata and BCA, predict that Indonesia's current account balance will experience a deficit in the first quarter of 2024. In fact, this position could continue into the second quarter, unless global commodity prices improve.

This current account deficit could be a factor that puts pressure on the rupiah. From an investor's perspective, the current account deficit is one of the main factors seen in a market.

KOMPAS/PRIYOMBODO

The exchange rate of the rupiah against the US dollar has continued to fluctuate above the level of Rp 16,000 throughout this week. This is happening in line with the strengthening of the US dollar index (DYX) which has moved 106 basis points or reached its highest level since November 9, 2023, this week. The upward trend of DYX has been happening since the end of March 2024.

When the stake becomes larger than the pole, the foreign exchange reserves will decrease. This situation can erode the monetary authority's ability to maintain the currency exchange rate's value. It is not surprising that a deficit in current account transactions can set a bad precedent.

This precedent, coupled with sentiments of global uncertainty, could worsen capital markets. Estimates from BI show that Indonesia's capital and financial transactions in the first to second quarters of 2024 will record a deficit. This capital situation which continues to experience net outflows also has the potential to continue to put pressure on the rupiah exchange rate.

Another factor that could also push down the rupiah exchange rate is the uncertainty of the geopolitical situation in the world. The prolonged conflict between Russia and Ukraine, coupled with the escalating situation in the Middle East due to the Israel-Palestine war, makes the global economy situation full of uncertainty.

This uncertain situation makes investors tend to take the safe route by investing in markets with lower risks.

This sentiment also causes the flow of capital to Indonesia, as an alternative market, to be delayed. Without intervention in the market, capital will continue to flow out of Indonesia and the value of the rupiah can become further depressed.

Also read: Anticipate the Impact of the Rupiah and Oil

Political stability

From several assumptions that have emerged, it is not excessive to worry about the weakening of the rupiah exchange rate. In addition to policies from monetary authorities, efforts to stabilize the rupiah exchange rate also need to be carried out by other institutions. One of them is political and government institutions.

This is because the market situation cannot be separated from national political dynamics. In addition to fundamental and technical analysis, the expectations of investors also contribute to market movements. Without stability, investors find it difficult to trust and invest in Indonesia.

Post-election consolidation is crucial to help maintain the rupiah exchange rate.

Undeniably, in the near future, post-election consolidation will be crucial to help maintain the value of the rupiah exchange rate. The solidification of relationships between contesting elites can signal that the instability brought by the previous election has subsided.

In addition, apart from the completed presidential election results, the winning party also needs to consider carefully about future coalition partnerships. Moreover, the placement of figures who will lead strategic positions related to the economy also needs to be taken into account.

We must not let the appointment of the next ministers further undermine market confidence in the state's ability to manage its economy. (KOMPAS RESEARCH)

Also read: Weakening of IHSG Continues, Rupiah Exchange Rate Policy Awaited