Rupiah Exchange Rate Update: Why is the Currency of Indonesia Weakening?
The Indonesian rupiah exchange rate is heading for its biggest weekly decline since the second week of December 2013. According to the Bloomberg Dollar Index, the currency of Southeast Asia's largest economy had depreciated 0.36 percent to IDR 11,572 per US dollar by 2.30pm local Jakarta time on Friday (23/05). However, year to date, the rupiah is still among the best performing Asian emerging currencies against the greenback (+5.19 percent). What are the reasons that explain the rupiah's weak performance this week?
The reasons why the rupiah experienced a tough week involve mainly domestic factors; both political and economic. Market participants were concerned to learn that the Golkar party (the second-largest political party of Indonesia based on the result of the April legislative election) decided earlier this week to join the political party coalition that supports Prabowo Subianto for president and Hatta Rajasa for vice-president. This coalition consists of the Gerindra, PAN, PKS, PPP and Golkar parties. This means that there is more political support for the Subianto-Rajasa pair than there is for the Jokowi-Kalla pair. The market clearly favours Jakarta Governor Joko Widodo, popularly known as Jokowi, to become Indonesia's next president but the latest move of the Golkar party has made some investors nervous.
Secondly, concerns about Indonesia's financial stability have increased after the government said it needs an additional USD $6.5 billion to finance fuel subsidies in 2014. Moreover, the government proposes to put the budget deficit at 2.5 percent of GDP, considerably higher than the initial forecast of 1.69 percent. Concerns about a widening current account deficit have also put pressure on the rupiah.
Meanwhile, the debt office within the Indonesian Finance Ministry announced it will issue IDR 26 trillion (USD $2.25 billion) worth of new conventional and sharia bonds by the end of the second quarter of 2014 in an attempt to finance the country's budget deficit. Previously, the government had already issued IDR 40 trillion worth of bonds in the second quarter.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.39 percent to IDR 11,560 against the US dollar on Friday (23/05).| Source: Bank Indonesia