The Indonesian rupiah has been rallying impressively over the past couple of days in the "post-Brexit" era. Amid severe uncertainty ahead of the Brexit referendum result, Indonesia's currency depreciated markedly on Thursday 23 June 2016. However, in the following days the rupiah started to strengthen, touching a two-month high against the US dollar (even though the US dollar has been strong as well due to the Brexit issue). Based on the Bloomberg Dollar Index the rupiah is now trading at IDR 13,175 per US dollar. What explains this recent rupiah strength?
Tax Amnesty Bill Indonesia
The primary reason why Indonesian assets have been strengthening markedly over the past two days is the passing of Indonesia's tax amnesty bill. Through tax incentives this program makes it attractive for (former) tax evaders to declare their offshore assets and - if wanted - to repatriate these funds into Indonesia.
Bank Indonesia, the central bank of Southeast Asia's largest economy, stated that it will intervene in the foreign exchange market to prevent the rupiah from strengthening too much due to the impact of the tax amnesty program (a strong currency would put pressure on the nation's export performance which is already in a weak condition given the low commodity prices and weak external demand). Indonesia's central bank is optimistic that the passing of the tax amnesty bill is to lead to excess funds in Indonesia's financial markets. Some IDR 560 trillion (approx. USD $42 billion) in offshore assets are estimated to be brought back home through the amnesty program according to Bank Indonesia estimates. Therefore, Indonesia's financial authorities have been preparing investment instruments (including state-owned corporate bonds, state bonds, mutual funds, and real estate investment trusts) to absorb this excess liquidity. However, the full impact of the tax amnesty program is expected to be felt in the last quarter of 2016.
The tax amnesty program is also expected to result in higher government revenue, thus reducing fiscal risks (the government's budget deficit has been widened to 2.35 percent of gross domestic product in the revised 2016 state budget). This would also mean that the central government does not need to cut its spending programs (infrastructure and social development).
Besides the bond and stock market, Indonesia's tax amnesty program may show to be a real boost for the nation's property sector. American multinational financial services corporation Morgan Stanley raised its price targets on Indonesia's property developers by up to 14 percent on expectation of higher earnings and better valuations.
On the medium to long term the big Indonesian banks are expected to benefit highly from the repatriated funds through the amnesty program. Although the risk of bad loans remains looming in Indonesia's banking industry, the capital inflow should manage to push down lending rates and boost credit growth on the longer term.
Federal Reserve Rate Hike off the Table?
Another positive development for the Indonesian rupiah, the benchmark Jakarta Composite Index and other emerging market assets, is that speculation about another Federal Reserve interest rate hike has ceased given the Brexit issue managed to rock global financial markets and could cause a UK recession. In fact, few investors and analysts expect to see a Fed Funds Rate hike at all in 2016.
Higher Oil Prices
Lastly, higher commodity prices have a positive impact on the rupiah exchange rate. Both Brent crude and West Texas Intermediate have been rallying beyond the USD $48 per barrel level over the past days.
Indonesia's benchmark Jakarta Composite Index (IHSG) surged 1.39 percent to 4,950.19 points in the first trading session on Wednesday (29/06).