A teller counts rupiah banknotes at a money changer in Jakarta, Indonesia. -- Photo: Reuters
JAKARTA (SCMP): Political instability in Indonesia coupled with global uncertainty over the trade war being waged by the United States contributed to Indonesia’s rupiah falling to a 27-year low, economists have said.
On Tuesday, the rupiah fell 0.54 per cent to 16,642 per US dollar in the morning trade, its deepest plunge since March 23, 2020, when it traded at 16,550 against the US dollar.
The rupiah’s worst market showing was on June 17, 1998, when it slumped to 16,800 per dollar.
The slide forced the country’s central bank, Bank Indonesia, to intervene, eventually propping the rupiah to 16,595 per US dollar when the market closed on Tuesday, a 0.24 per cent decline from Monday’s trade.
Fitra Jusdiman, director of monetary and securities asset management at the central bank, said the central bank would “continue anticipatory, mitigatory responses to ensure stability in the rupiah exchange rate”. He added that it would maintain foreign exchange supply and demand “including by intervening in a bold and measured way”.
The latest downturn had been caused by US President Donald Trump’s tariffs and tensions in the Middle East, among other events, Fitra said.
In Jakarta, Airlangga Hartarto, coordinating minister of economic affairs, told reporters that he was confident the central bank would do the work to stabilise the rupiah exchange rate, while “we will continue to maintain strong economic fundamentals”.
Indonesia’s currency has been one of the weakest-performing emerging market currencies this year. -- Photo: Reuters
Political instability?
Uncertainty over Trump’s trade war might drive investors to anticipate potential risks by “purchasing US dollars before the long [Eid] holiday”, Josua Pardede, chief economist at private lender Bank Permata, told This Week in Asia, referring to the Muslim celebration marking the end of the fasting month of Ramadan.
“Apart from the trade war, the depreciation of the rupiah exchange rate was also caused by the downward trend in prices of Indonesia’s main export commodities, such as crude palm oil, coal, and nickel in the past week,” Pardede said.
“The decline in commodity prices boosted expectations of a widening of Indonesia’s current account deficit this year, thereby increasing projections of rupiah exchange rate depreciation.”
Indonesian law mandates that the budget deficit should not be more than 3 per cent of its gross domestic product, a threshold that has generally been met by Jakarta, except during pandemic years of 2020 and 2021.
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Bhima Yudhistira, executive director of the Jakarta-based Centre of Economic and Law Studies think tank, suggested that the rupiah’s depreciation underlined the market’s “distrust” towards Prabowo’s leadership and economic policies, including the establishment of new sovereign wealth fund Danantara.
On Monday, Danantara announced its top management, including former prime minister of Thailand Thaksin Shinawatra, billionaire Ray Dalio and investor Chapman Taylor on its board of advisers. According to Bhima, the market may see the selection of Thaksin, who was sentenced to eight years in prison for corruption and abuse of power, as “not reflecting professionalism”.
“[The weakening of rupiah] is also the effect of mass action that occurred in many cities because they protested against the revision of the [military] law that was passed in a hurry [by the parliament]. It shows that there is political instability [in Indonesia],” Bhima said.
Declining purchasing power and mass lay-offs in the manufacturing sector may be other domestic factors that dampen the market’s appetite for rupiah, he added.
“There were already signs of pressure on people’s purchasing power, such as a 21 per cent drop in imports of consumer goods in January-February this year, compared to January-February last year. There is something wrong [with the economy] if imports of consumer goods fell before Eid,” Bhima said.
A fruit seller waits for customers at a traditional market in Banda Aceh, Indonesia, earlier this month. -- Photo: EPA-EFE / SCMP
Further decline?
Bhima warned that rupiah depreciation would cause prices of goods to increase after the Eid holiday, as businesses paid more for imported raw materials. Mass lay-offs could occur if companies could not afford the more costly raw materials, as well as their foreign debts, he added.
Weaker demand, low spending power, and the depreciating rupiah are also likely to put pressure on economic growth. The Organisation for Economic Co-operation and Development in its economic outlook issued earlier this month dropped its growth projection for Indonesia to 4.9 per cent, lower than the Prabowo administration’s target of 5.2 per cent.
Bhima predicted that pressure could mount on the rupiah in “one or two months after Eid”, when it could plunge further to “17,000-17,500” against the US dollar.
Pardede of Bank Permata also expected that depreciation was unlikely to ease in the next couple of days, although “we still see room for appreciation, albeit limited, in line with the release of several US [economic] data, which are expected to weaken”, he said.
The central bank “is also expected to prioritise the stability of the rupiah exchange rate through intervention policies in the money market”, Pardede said. “In general, we see the rupiah potentially moving in the range of 16,550-16,650 rupiah per US dollar in the next two days.”
He said Indonesia’s current economic conditions “show much stronger fundamentals” compared with past financial crises. This included foreign exchange reserves amounting to US$156.1 billion, “enough to finance more than six months of imports and foreign debt payments, a significant increase from US$17.4 billion in 1998 and US$50.2 billion in 2008”, Pardede said.
“Overall, Indonesia is now in a much more prepared and resilient position to face global pressures, with solid economic foundations and relatively well-maintained policies,” he added.
Additional reporting by Reuters - South China Morning Post
