The Indonesian rupiah exchange rate depreciated 0.54 percent to IDR 11,822 per US dollar in the past week (based on the Bloomberg Dollar Index). Several internal and external factors influenced the currency’s performance over the past week, such as increased US dollar demand from local Indonesian companies, Bank Indonesia’s decision to leave the BI rate unchanged and the improving US economy. Lastly, the structural current account deficit (triggered by expensive oil imports) remains a problem for investors.
Recovery of the US Economy
US retail sales increased 0.6 percent in August 2014 (as Americans purchased more cars and other goods; retail sales account for a third of US consumer spending), while the Michigan consumer sentiment index hit a 14-month high (84.6) in September. These figures ease concerns about US consumer spending and form an indication that the US recovery momentum is being sustained. The economy of the USA may expand by 3.5 percent in the third quarter of 2014.
Due to the combination of an improving US economy and a sluggish European economy, investors have been eager to invest in safer assets (for example in the USA). This is a reason why the US dollar has recently strengthened against emerging market currencies, including the Indonesian rupiah.
Continued US economic recovery is expected to lead to US interest rate hikes in 2015. This will then lead to capital outflows from emerging markets.
Local US Dollar Demand
Ahead of the month-end, Indonesian companies rush to buy US dollars to pay interest on US dollar denominated overseas debt. The central bank of Indonesia (Bank Indonesia) recently stated that total outstanding overseas debt reached USD $284.9 billion in June 2014, a 10.4 percentage point increase from the same month last year. Total private sector debt rose 14 percent (year-on-year) to USD $153 billion in June. For example, airline Garuda Indonesia - the country’s flag carrier - currently has a debt of USD $38.9 million (January-June 2014) as about 70 percent of airlines’ operations are in US dollars.
Bank Indonesia Keeps the BI Rate at 7.50%
On Thursday (11/09), Bank Indonesia announced to keep the benchmark interest rate (BI rate) at 7.50 percent (a relatively high level) due to external factors (particularly anticipating monetary tightening in the USA) and internal factors (in an attempt to curb the wide current account deficit which stood at USD $9.1 billion, or, 4.27 percent of the country's gross domestic product in the second quarter of 2014). The central bank also announced that it plans to continue the tight monetary policy until the end of 2014. Market participants responded positively to this policy and it therefore provided some support for the rupiah. Between June and November 2013, Bank Indonesia gradually raised its BI rate from 5.75 percent to 7.50 percent in an effort to ease inflation (which had accelerated sharply after the government raised prices of subsidized fuels in June 2013), curb the wide current account deficit and to support the rupiah.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.52 percent to IDR 11,831 per US dollar during the past week.
Bank Indonesia's Benchmark Rupiah Rate:| Source: Bank Indonesia