Although the Indonesian rupiah exchange rate appreciated 0.86 percent to IDR 11,995 per US dollar on Friday (27/06) as economic data from China, South Korea and Taiwan sparked optimism that regional growth has picked up, the recent depreciating trend of Indonesia’s currency burdens the country’s manufacturing industry. This industry is still dependent on imports of raw materials, capital goods and auxiliary materials, which are paid using US dollars causing the domestic industry to feel the financial impact of a weaker rupiah.
Indonesian Industry Minister MS Hidayat said on Thursday (26/06) that he hopes the rupiah will soon change to an appreciating trend as the manufacturing industry contributes significantly to Indonesia’s general economic development. With a weak rupiah, local prices of Indonesian manufactured products need to be raised in order to offset higher import costs. This then leads to reduced demand from Indonesian consumers. The subsequent slowdown of the industry sector will impact on general economic growth of Southeast Asia’s largest economy.
In the first quarter of 2014, Indonesia’s manufacturing industry grew 5.16 percent (year-on-year, yoy) and the non-oil & gas sector 5.56 percent (yoy) compared to the same period last year. In full-year 2013, the industry had expanded 6.19 percent.
Indonesian Manufacturing Industry:
Source: Ministry of Industry
After seeing the disappointing 5.21 percentage point GDP growth result in the first quarter of the year (significantly below analyst and government projections), the government downgraded its forecast for growth of the nation’s manufacturing industry in 2014 to 6.2 percent (year-on-year) from the initial range of between 6.4 to 6.8 percent (but still higher than this year’s GDP growth forecast of 5.5 percent).
The rupiah has depreciated from the level of IDR 11,271 per US dollar on 1 April 2014 to IDR 12,103 on 27 June according to the central bank's mid rate, thus becoming one of the weakest Asian currencies in the past months.| Source: Bank Indonesia
The central bank of Indonesia recently stated that it will allow rupiah depreciation in an attempt to curb the country’s current account deficit which was recorded at USD $4.19 billion, equivalent to 2.06 percent of gross domestic product in the first quarter of 2014. This deficit is expected to widen in the second quarter. By letting the rupiah depreciate, Indonesian exports will become more attractive (competitive) while imports become more expensive. This will then improve the trade balance, subsequently resulting in a stronger rupiah exchange rate, according to Bank Indonesia.
Minister Hidayat said that the slowing growth in the country’s manufacturing industry is not only caused by the weakening rupiah but also because of the implementation of the Minerba Act on 12 January 2014. This act, part of the new 2009 Mining Law, prohibits exports of raw minerals. This law stipulates that mineral ore needs to be processed domestically first before export is allowed. However, due to a lack of domestic processing facilities, the industry has become stuck. According to the minister, the negative impact of the Minerba Act will still be felt for one or two years but is ‘back to normal’ after sufficient smelting capacity has been established in Indonesia.