The Indonesian rupiah exchange rate depreciated considerably on Wednesday (25/06) after Indonesia’s central bank (Bank Indonesia) said it would allow rupiah depreciation in an attempt to boost competitiveness of the country’s exports, while curbing imports. This strategy will have a positive impact on the country’s troubled trade balance. Based on the Bloomberg Dollar Index, the currency had weakened 0.67 percent to IDR 12,070 per US dollar by 14:30pm local Jakarta time.
Although Indonesia’s trade balance is expected to record a surplus in May 2014, supported by a marked improvement of crude palm oil exports as well as a slowdown in mobile phone imports, the USD 1.96 billion trade deficit in April 2014 has increased pressure on the country’s current account deficit (which stood at 2.06 of gross domestic product in the first quarter of 2014). A weaker currency is a strategy to improve the balance as it makes Indonesian exports more attractive and imports more expensive.
The violence in northern Iraq (the OPEC’s second-largest oil producer) where Sunni insurgents captured territory has given rise to soaring oil prices in the past two weeks as these geopolitical tensions can disrupt oil supplies from the Middle East. The militants battle with government forces for control of the largest oil refinery of Iraq, Baiji, which produces 300,000 barrels of oil per day. For countries that are net importers of oil, such as Indonesia, these higher oil prices are a serious financial burden. The latest news stories, however, claim that the threat of oil supply disruptions is receding. The Brent Crude price fell below USD $114 per barrel on Wednesday (25/06).
Apart from the trade balance, Indonesia’s currency also still feels the negative impact of increased US dollar demand ahead of the holy fasting month of Ramadan (which starts in late-June and always triggers increased spending and inflationary pressures) as well as political uncertainties as the presidential election has become a tight race between market favourite Joko Widodo (Jokowi) and controversial Prabowo Subianto (the election is scheduled for 9 July 2014). Therefore, market participants tend to wait & see for the result first.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.23 percent to IDR 12,027 against the US dollar on Wednesday (25/06).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia