Indonesia Susceptible to Capital Outflows due to Improving US Economy
An improving US economy can lead to capital outflows worth IDR 130 trillion (US $11.2 billion) from Indonesia as funds are expected to flow back to the USA when interest rates are raised. Since 2009, emerging markets, including Indonesia, benefited from capital inflows amid large monetary stimulus provided by the Federal Reserve (quantitative easing as well as low interest rates). Although the stimulus was aimed at boosting the US economy, emerging markets felt the side effects (such as capital inflows and appreciating emerging market currencies).
When the Federal Reserve started to speculate about a winding down of its massive bond-buying program in 2013, emerging markets immediately felt the impact of the looming change in US monetary policy: large capital outflows followed, thereby placing serious pressure on emerging market currencies such as the Indonesian rupiah exchange rate. The rupiah depreciated about 26 percent against the USD dollar from IDR 9,685 on 2 January 2013 to IDR 12,242 per US dollar on 2 January 2014 (Jakarta Interbank Spot Dollar Rate). According to Bank Indonesia Governor Agus Martowardojo, with the further reduction of the monthly US bond-buying program and expected interest rate hikes in 2015 and 2016, global investors may pull USD $11.2 billion from Indonesia.
The rupiah may weaken further as continued expansion of the US manufacturing sector provides positive market sentiments for the US dollar. Furthermore, Indonesia's current account deficit is a major concern to investors. In April 2014, Indonesia recorded a USD $1.97 billion trade deficit. Lastly, political uncertainty has put pressure on the rupiah as the political party coalition that supports controversial presidential candidate Prabowo Subianto is larger than the coalition that supports Joko "Jokowi" Widodo.
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