Bank Indonesia Comfortable with Weak Rupiah to Improve Current Account
The Indonesian rupiah exchange rate depreciated 0.79 percent to IDR 12,932 per US dollar according to the Bloomberg Dollar Index on Friday (27/02), its weakest level since end 2008, after the country’s central bank (Bank Indonesia) said it would not intervene too much to support the currency. Bank Indonesia said that it has no target level for the rupiah and will not go against the market. For the market these are signals that the central bank is comfortable with a weaker currency as that would improve the trade balance.
A weaker rupiah makes Indonesian exports more competitive, while imports become relatively expensive. This should have a positive impact on the country’s trade balance. The current account balance of Indonesia has shown a structural deficit since late 2011 hence reducing investors’ confidence in the country’s financial fundamentals. The current account balance is the broadest measure of a country's trade with the world, including trade in goods, services, tourism and returns on the country's foreign investment. A deficit signals that the country is relying on foreign inflows and thus makes the country vulnerable to capital outflows in times of global shocks. In 2014, Indonesia had a current account deficit of 2.95 percent of the country’s gross domestic product (GDP). Bank Indonesia expects that the deficit will increase to about 3 percent of GDP this year.
Moreover, in mid-February the central bank cut its key interest rate (BI rate) in a surprise move by 25 basis points to 7.50 percent. In combination with bullish US dollar momentum in recent months (caused by the improving US economy and subsequent monetary tightening policies implemented or to be implemented by the Federal Reserve) this has had a negative impact on the value of the rupiah. The rupiah is one of the weakest performers among Asian emerging markets (against the US dollar) this year so far. Earlier this week, Bank Indonesia Governor Agus Martowardojo said that the depreciating trend of the rupiah is logical as the US dollar is appreciating against basically all currencies and therefore the rupiah is expected to continue its depreciating trend in the period ahead.
These signals from Indonesia’s central bank offset the positive impact of Fed Chairwoman Janet Yellen’s statements in front of the US Senate Banking Committee on Tuesday (24/02) that the Fed will not rush to raise interest rates. This immediately led to speculation that US interest rates will not be raised before summer and thus fueled appetite for emerging market assets, including Indonesian stocks and the rupiah.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.01 percent to IDR 12,863 per US dollar on Friday (27/02).
Indonesian Rupiah versus US Dollar:
| Source: Bank IndonesiaMeanwhile, Indonesian stock only fell slightly on Friday’s trading day (27/02). Indonesia’s benchmark stock index (Jakarta Composite Index, abbreviated JCI or IHSG) declined 0.02 percent to 5,450.29 points.
Jakarta Composite Index (IHSG):