In the past couple of days the US dollar regained its bullish momentum, strengthening against most other currencies including the Indonesian rupiah. The greenback had been under pressure after the Federal Reserve signalled - contrary to markets expectation - it would not raise the US interest rate environment too soon as the US economic growth outlook and US inflation were still not at the right level yet. This made emerging market assets more attractive for the short-term. However, this development seems to have been short-lived.
The Indonesian rupiah exchange rate had depreciated 0.32 percent to IDR 13,059 per US dollar at 11:11 am local Jakarta time on Friday (27/03) based on the Bloomberg Dollar Index. Apart from looming higher interest rates in the USA and local Indonesian companies’ US dollar demand for debt payments at the end of March, there are several other important factors that influence the performance of the rupiah.
• Conflict Middle East
An important factor is unrest in the Middle East (giving rise to a sharply rising crude oil price). Saudi Arabia, supported by its Gulf Arab allies, bombed military installations in Yemen to oust Shiite rebels (Houthis) who had forced Yemen President Abed Rabbo Mansour Hadi to flee Yemen. Iran immediately called the Saudi airstrikes an ‘invasion’. As such, the civil war in Yemen may turn into a large regional conflict. This conflict leads to worldwide investor appetite for safe haven assets, such as the US dollar.
• US Initial Jobless Claims
According to the latest data from the US Department of Labor, the number of American individuals filing for initial jobless benefits in the week ending on 21 March 2015 fell from 291,000 to 282,000, a five-week low. As usual, economic data - particularly regarding US unemployment and inflation - that signal an improvement of the US economy will lead to expectation that US interest rates will rise sooner than expected and therefore capital flows back from emerging markets to the USA.
• Greece and the Eurozone’s Quantitative Easing Program
Meanwhile, although few expect to see a Greek exit ‘Grexit’ from the euro as Greece seems committed to stay within the Eurozone, uncertainty about the debt situation increased on Wednesday as Greece failed to secure a quick cash payment from the Eurozone rescue fund to help avert a potential bankruptcy next month. Next Monday, Greece is expected to present a detailed list of reforms to its Eurozone partners. Political or economic uncertainty always fuels appetite for safe haven assets, thus a strengthening US dollar.
Furthermore, the recently introduced quantitative easing program of the European Central Bank (a move to boost inflation and economic growth in the Eurozone) causes the euro currency to weaken and this also drags down currencies that are regarded ‘risky’ such as the rupiah.
Indonesia is forecast to see more capital outflows in the period ahead as foreign investors have become concerned about the sharp depreciation of the rupiah versus the US dollar (causing rising import costs), the country’s wide current account deficit, and the country’s record high level of (private) foreign debt. Meanwhile, the country’s foreign exchange earnings have been limited due to low commodity prices since the late 2000s (offsetting the benefits of a weak rupiah).
Indonesia’s private sector foreign debt has roughly tripled since 2007. Based on the latest data from Bank Indonesia, private sector foreign debt stood at USD $162.9 billion in January 2015. For investors this causes serious concerns about corporate earnings in Indonesia as the weak rupiah exacerbates the debt situation for private companies, particularly because a large chunk of this private foreign debt is unhedged and constitutes short-term debt.
After the rupiah has depreciated more than 25 percent against the US dollar in 2013, depreciated about 2 percent in 2014, and has weakened about 5 percent against the greenback so far this year, many foreign investors are sitting on losses as profit from Indonesian stocks and bonds vaporized due to the weak rupiah. For example, in US dollar terms, the benchmark stock index of Indonesia (Jakarta Composite Index) is one of the worst performers in the Asian region this year, although in rupiah terms the index has climbed over three percent so far in 2015 (Indonesia’s benchmark index is already trading expensively at 17 times earnings).
Hence the weak rupiah causes foreign investors to withdraw from Indonesian assets. As foreign investors account for about 40 percent of total equity transactions at the Indonesia Stock Exchange, Indonesia heavily feels the impact of reduced foreign appetite for Indonesian assets.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.47 percent to IDR 13,064 per US dollar on Friday (27/03).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia