Managing Indonesia Rupiah

Indonesian policy makers wrestling with a weaker currency have a message for the market: welcome to the new normal.

As the rupiah languishes near levels last seen in 1998, Indonesian officials are making it clear they see the situation as manageable. Rather than hit the panic button, both the central bank and government maintain South-east Asia’s biggest economy is on solid ground, and could even benefit from the rout.

“In terms of stability, Bank Indonesia will certainly keep managing the exchange rate so that we will be able to guard the economy and adjust to a new equilibrium level,” Finance Minister Sri Mulyani Indrawati said last week.

“We must cautiously monitor this level. But I also see that the adjustment in our economy to the normalisation level of US monetary policy, which affects the rupiah value, can go quite well.”

Indonesia’s economy has been one of those hardest hit by a stronger dollar and rising US interest rates – its currency has slumped 11% against the greenback this year. Yet at the same time, there are signs of global investors coming back: funds have bought about US$870mil of government bonds this year as foreign ownership rebounds from last month’s low.

Indonesia’s central bank has mounted an aggressive response to the emerging-market rout, raising its key reference rate by 150 basis points since May. Bank Indonesia has also been intervening in the currency and bond markets to stabilise the rupiah, with its stash of foreign reserves falling about 13% this year from a record amount in January.

The rupiah, meanwhile, has continued to weaken, slumping to 15,248 per dollar yesterday, the lowest since July 1998 when the economy was at the centre of the Asian financial crisis. Still, Bank Indonesia governor Perry Warjiyo is adamant that it’s not so much where you are, but how you get there.

Speaking to foreign media last week, Warjiyo questioned whether it was fair to compare the rupiah’s current value to 1998, when the decline was much greater and the situation much more volatile.

“Of course, our rupiah is under firing,” he said, adding however, that it had depreciated less than currencies in India, South Africa, Turkey and Argentina.

While the rupiah is this year’s worst-performing currency in Asia after the rupee, the Argentinian peso is down more than 50%. The rand has weakened more than 16% while the lira has plunged about 38% against the dollar.

“Our depreciation is still manageable,” Warjiyo said.

The rupiah swung wildly during the Asian crisis, going from a regulated rate below 3,000 versus the dollar to almost 17,000 when a flexible exchange rate was implemented. 

The five rate hikes since May form part of a coordinated response with the government, as well as an effort to lower the current-account deficit, according to Warjiyo. The deficit, at about 3% of gross domestic product, has been cited as a key reason why Indonesia has been punished by the emerging-market sell-off.

The rupiah weakness, however, could ultimately help turn around the current-account shortfall, according to Suahasil Nazara, head of fiscal policy office at the Finance Ministry. Exports would likely become more competitive, but at the same time imports will be more expensive, he said.

“In terms of the budget, we are looking at the impact,” he said. “But the impact is manageable.”