The central bank of Indonesia (Bank Indonesia) hiked its benchmark interest rate three times over the past six weeks - by a total of 1.00 percent to take the benchmark to the level of 5.25 percent - in order to defend the rupiah. Last Friday (27/06) Bank Indonesia surprised part of the market by implementing a 0.50 percent rate hike. As a result, the rupiah strengthened markedly. However, its impact on the rupiah performance seems very temporary. This week the rupiah is again depreciating, hovering around the IDR 14,400 per US dollar level.
There are major pressures (particularly external ones) impacting on the Indonesian rupiah, hence undermining the impact of the higher benchmark interest rate. This also gives rise to the question whether Indonesians (and analysts) need to become used to a new equilibrium for the rupiah. Amid the present context it seems impossible for the rupiah to appreciate back below the IDR 14,000 per US dollar. In fact, its seems the rupiah can basically only wait for the loss of US dollar momentum before regaining some ground (and still the rupiah would then probably only recover to a level of IDR 14,200 per US dollar).
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.61 percent to IDR 14,418 per US dollar on Tuesday (03/07).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
To recap, what are the key matters that are putting significant pressure on the rupiah (as well as on the other emerging market currencies in Asia)?
- In June the Federal Reserve hiked its benchmark interest rate for the second time this year. Moreover, the Fed signaled that it will raise its key rate twice more before the end of the year. Higher rates in the USA encourage capital outflows from emerging markets, including Indonesia. On Thursday (05/07) the Fed is scheduled to release its FOMC minutes. Markets will be eager to look for any further clues. If the Fed is rather hawkish then pressures on the rupiah should mount further
- Rising concern/uncertainty over global trade tensions, led by USA-China trade relations. It can lead to a global trade war, something that would also impact negatively on global economic growth. Manufacturing data - released earlier this week - show a decline in manufacturing activity in the Asian region. It is assumed that this is the consequence of simmering trade tensions. And it may become worse after more trade tariffs are imposed (particularly those tariffs involving trade between the USA, China, and the European Union)
- Chinese authorities are deliberately weakening the Chinese yuan to make its exports more competitive. As a consequence, other emerging market currencies slide accordingly. While in theory rupiah weakness makes the country's export products more competitive on the international stage, this theory loses strength when currencies in all of Asia's emerging markets depreciate against the US dollar
- International crude oil prices are touching 3.5 year-high levels. Considering Indonesia is a net oil importer, it puts pressure on the rupiah and the government's budget deficit (due to energy subsidies) although this is partly offset by an increase in revenue from Indonesia's oil & gas exports
- Indonesia saw big monthly trade deficits in April and May. This is adding more pressures on the country's current account deficit (which is expected to widen in 2018)
- Although still at a comfortable level, Indonesia's foreign exchange reserves have declined significantly over the past couple of months as the central bank sold forex to defend the rupiah
- Credibility of the fiscal budget; part of the market is concerned about the government's decision to keep subsidized fuel and electricity prices steady (despite higher global crude oil prices) until at least late-2019 (implying that the government needs additional funds to spend on energy subsidies). With the government's budget deficit targeted at 2.19 percent of GDP, it needs to cut spending in other (more productive) fields