Indonesia’s Rupiah Rate Falls to Weakest Level since August 1998

As economic data from the USA, the world’s largest economy, continue to improve, global investors are increasingly anticipating higher US interest rates. Emerging markets are thus experiencing capital outflows. According to data from Indonesia Finance Ministry, overseas investors pulled IDR 10.1 trillion (roughly $800 million) from local-currency sovereign bonds between 1 and 11 December 2014. Due to the country’s wide current account deficit, Indonesia is a particularly vulnerable emerging market (although low oil prices and Indonesia’s recent subsidized fuel price hike somewhat softens the external pressure). Furthermore, Indonesia’s capital markets are characterized by high foreign ownership and thus highly exposed to a strengthening US dollar.

Reuters reported that Indonesia’s credit default swaps have been a major underperformer on Monday. The 5-year contract or the cost of insuring sovereign debt for 5 years rose 10 basis points to 165/175 basis points compared with the broad market index which widened by 6 basis points. Other sovereign CDS added 3 to 7 basis points.

Standard Chartered Bank economist Fauzi Ichsan said that Indonesia’s central bank (Bank Indonesia) has two choices to support the rupiah and avoid a downward spiral. Firstly, Bank Indonesia can intervene more aggressively in the foreign exchange market (implying declining foreign exchange reserves). Or, secondly, it can hike the FASBI rate (the overnight deposit rate) which is currently still at 5.75 percent.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 1.34 percent to IDR 12,599 per US dollar on Monday (15/12).

| Source: Bank Indonesia

Further Reading:

Indonesia’s Rupiah at 6-Year Low; Expected to Weaken until Mid-2015