The central bank of Indonesia (Bank Indonesia) is set to announce the second installment of a policy package that aims at raising onshore US dollar supplies (and liquidity). As the rupiah has been the second worst-performing Asian emerging market currency (after Malaysia’s ringgit), having depreciated 18.1 percent against the US dollar so far in 2015, Indonesian policymakers are anxious to prop up the ailing currency in order to safeguard the country’s financial stability. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) stood at IDR 14,690 per US dollar on Friday (25/09), a 17-year low.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Amid looming further monetary tightening in the USA (i.e. higher US interest rates), low commodity prices and the hard landing of China’s economy (including yuan devaluation), the Indonesian rupiah has been fragile. Given that Indonesia’s private sector foreign debt has accelerated rapidly in recent years (to a total of USD $169.2 billion per July 2015) and remains largely unhedged, rupiah depreciation exacerbates these companies' debt situation. Indonesian state news agency Antara reported in late August that stress test simulations showed that banks and non-banking financial institutions could go bankrupt in case Indonesia’s rupiah hits IDR 16,000 per US dollar.
Amid current uncertainty about the timing of higher US interest rates, Indonesian stocks and the rupiah have been weakening. Indonesian central bankers were therefore not amused to see the Federal Reserve postpone a Fed Fund Rate hike in its September policy meeting. Most investors believed that this delay meant that the Fed was still pessimistic about global economic conditions. However, earlier this week Federal Reserve Chairwoman Janet Yellen stated that the Fed is still on track to raise interest rates before the year-end, hence somewhat restoring investors' confidence in global economic conditions.
The decision to raise US interest rates will most likely trigger capital outflows from emerging markets, particularly those that have certain financial weaknesses. Indonesia, for example, still has a rather wide current account deficit (nearly three percent of the country’s gross domestic product), indicating a heavy reliance on foreign capital inflows. Moreover, Southeast Asia’s largest economy is particularly vulnerable to capital outflows as a large share of Indonesia’s government debt is in foreign hands.
Earlier in September, the Indonesian government had unveiled the first installment of the stimulus package. This first installment focused on deregulation measures in order to boost foreign and domestic direct investment and therefore only affected the rupiah in an indirect manner. Bank Indonesia’s package, on the other hand, aims to stabilize the rupiah exchange rate in a direct manner.
Bank Indonesia’s new policy package includes a relaxation of requirements regarding forward US dollar selling as well as a tax incentive for exporters to keep their US dollar stored at local banks. Currently, exporters are required to show an underlying document for every forward US dollar selling transaction exceeding USD $1 million. Bank Indonesia is expected to raise the threshold to USD $5 million. Bank Indonesia also suggests to lower the tax (currently at 20 percent) that local exporters have to pay on bank interest in case they deposit funds in local banks. However, this move needs approval from Indonesia’s Finance Ministry.
In recent months Bank Indonesia has been using the foreign exchange reserves in order to defend the rupiah. According to unofficial Bank Indonesia data the country’s forex reserves have fallen by USD $12 billion between the end of February and mid-September 2015 due to central bank intervention.