The Indonesian rupiah exchange rate had depreciated 0.20 percent to IDR 11,819 per US dollar by 15:30pm local Jakarta time based on the Bloomberg Dollar Index. This performance is in line with the performance of other emerging currencies in Asia, which all tend to weaken against today’s strengthening US dollar. One of the factors that pressures on the rupiah is the geopolitical tensions in Iraq which have resulted in a rising oil price (last week the oil price rose by 4.5 percent).
A higher oil price is a major problem for those countries that rely on oil imports to meet domestic demand. Indonesia is one of the countries that is characterized by massive oil imports, partly due to the government’s fuel subsidy program, thereby triggering financial turmoil (for example the country’s current account deficit). Due to these massive energy subsidies (involving fuels and electricity), the government’s fiscal balance is susceptible to the effects of rupiah depreciation and higher crude oil price (both of which can balloon public spending on subsidies).
The current Susilo Bambang Yudhoyono government, which will rule until October 2014, stated that it may need to cut spending plans by IDR 100 trillion (roughly USD $8.5 billion) in 2014 due to surging subsidies. Another fuel price hike might be needed to create some more financial room for the next government.
The rupiah is expected to remain sluggish until the presidential election is over. On 9 July, the Indonesian people will vote for their next leader. The race between Joko Widodo and Prabowo Subianto is tight, fuelling uncertainty about the outcome. Both candidates have announced that they advocate a gradual winding down of the country’s energy subsidies.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.28 percent to IDR 11,814 against the US dollar on Monday (16/06).
The benchmark stock index of Indonesia (Jakarta Composite Index or IHSG) has been in the red zone for most of the day. By 15:30pm local Jakarta time, the index had declined 0.80 percent. The decline is mainly due to the higher oil price which impacts on most Asian stock indices and currencies.