Also India's rupee is under heavy pressure. Both Indonesia and India have to cope with significant current account deficits, implying they rely on overseas financing. Pressures on Wednesday (05/09) are particularly caused by news that South Africa slumped into a recession in Q2-2018, while Turkey reported a surge in inflation (and market participants are in doubt whether its central bank will do enough to shore up confidence). Today, these news stories cause major concerns about emerging market contagion, hence investors are in search of safe haven assets, and are particularly dumping assets in countries that exhibit current account deficits.

Meanwhile, a strengthening US economy has already been causing broad-based US dollar strength and - most likely - will cause two more Fed Funds Rate hikes in September and December 2018, thus putting even more pressure on emerging market assets. Lastly, simmering concerns about global trade also cause a high degree of uncertainty about global economic growth (especially China's growth). US President Donald Trump threatened to ramp up a trade dispute with China by announcing tariffs on USD $200 billion worth of additional Chinese products.

On Wednesday (05/09) it was also announced that Indonesia plans to delay USD $25 billion worth of power plant projects across the country in an effort to limit the need for imports, thus seeking to rein in its widening current account deficit. Ignasius Jonan, Indonesia's Minister of Energy and Mineral Resources, said the delay in almost half of Indonesia's planned 35 gigawatts of electricity projects could help to curtail imports by up to USD $10 billion.

Jonan also ordered the country's mining and metal companies to repatriate their export earnings into Indonesia - or store them in offshore branches of local banks - to boost domestic US dollar supplies. If companies fail to comply, then they may have to face sanctions. Meanwhile, Indonesia's crude oil production (whether produced by foreign or domestic oil & gas companies) must first be offered to state-owned energy company Pertamina. This could save as much as USD $4 a barrel on shipping costs alone.

Meanwhile, the Indonesian government also plans to curb imports of various consumer goods to ease pressures on the current account deficit that touched 3.0 percent of gross domestic product (GDP) in the second quarter of 2018. On Wednesday (05/09) a final list is expected to be published containing products that will soon carry higher import taxes. On the short-term this policy may actually lead to a rapid surge in demand for foreign consumer products (thus putting more pressure on the rupiah) as importers want to take advantage of lower import tariffs ahead of the hike.

Indonesian President Joko Widodo said multiple external factors are behind current rupiah weakness. Widodo prioritizes to see an increase in investment and exports in order to contain the country's current account deficit.

For a detailed analysis of the rupiah performance and our outlook for the foreseeable future, we refer you to our latest Indonesia Investments' research report


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