Bank Indonesia emphasized that recent rupiah weakness is a normal trend considering looming further monetary tightening in the USA. Since May 2013, the US dollar has had bullish momentum due to the looming winding down of the US quantitative easing program. This momentum persists as the US Federal Reserve is expected to raise US interest rates before the end of the year. The timing of an interest rate hike is data-dependent and therefore each time positive US macroeconomic data is published pressures on the rupiah (as well as on most other global currencies) increase. The latest US data that cause heightened expectation of a US interest rate hike later this year is US home resales (which grew to its highest level in nearly 8.5 years).

As such, Bank Indonesia claims that the weakening rupiah is mainly caused by external factors, not so much domestic ones. Indeed, it is true that bullish US dollar momentum causes great depreciating pressures on the rupiah. However, domestic conditions do influence the extent to which the rupiah weakens. There are several matters that hollow investors’ confidence in the rupiah thereby providing additional pressures. Two important matters are the continuation of Indonesia’s slowing economic growth (caused by weak export performance amid weak demand for commodities, Indonesia’s high interest rate environment, and slow government spending), and Indonesia’s wide current account deficit.

Earlier this week, Bank Indonesia revised down its forecast for Indonesia’s economic growth in 2015 from the range of 5.0 - 5.4 percent to the range of 5.0 - 5.2 percent. However, Bank Indonesia Governor Agus Martowardojo said this new target can only be met provided that the Indonesian government can boost infrastructure development. This year, the government budget for infrastructure development was raised to IDR 290.3 trillion (approx. USD $22 billion) in the revised 2015 state budget (after fuel subsidies had been largely scrapped in January 2015). However, the government has serious problems in spending these funds, partly the result of bureaucratic infighting and weak cooperation among ministries, other government agencies and local governments. Last month, Indonesian Finance Minister Bambang Brodjonegoro said the government had only spent approximately 8 percent of its total infrastructure budget in the first six months of 2015, implying the presence of severe bottlenecks. Many regard government-led infrastructure development as the key to accelerated economic growth as various sectors related to infrastructure will grow accordingly.

It is therefore possible that the economic slowdown, which started in 2011, will continue. Recently, the World Bank revised down its 2015 projection for Indonesia to 4.7 percent from 5 percent previously, while the Asian Development Bank (ADB) cut its 2015 projection for Indonesia from 5.5 percent to 5 percent. In the first quarter of 2015 Indonesia’s economy grew at a pace of 4.71 percent (y/y), the slowest pace in five years. In early August Statistics Indonesia will release the official Q2-2015 GDP figure. However, it is expected to be similar to the growth pace in the preceding quarter as Indonesian exports and imports have been weakening (there has been no rebound in commodity prices) and domestic consumption remains sluggish.

Meanwhile, the current account deficit (CAD) of Indonesia is expected to widen to 2.3 percent of GDP in the second quarter of 2015 from 1.85 percent of GDP in Q1-2015. However, it is normal for Indonesia’s CAD to weaken in the second quarter of the year as foreign companies repatriate dividends abroad while imports increase due to the Ramadan and Idul Fitri celebrations. When compared to the 4.27 percent of GDP CAD in Q2-2014, the 2.3 percent CAD forecast for Q2-2015 would actually imply a major improvement. However, considering Indonesia’s exports have been declining it makes the country more dependent on volatile portfolio inflows (that can quickly change into outflows in times of global economic turmoil).

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.19 percent to IDR 13,394 per US dollar on Thursday (23/07).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

So far this year, the rupiah has weakened 7.7 percent against the US dollar, making it the worst-performing emerging Asian currency after Malaysia’s ringgit (which has been plagued by low Brent and palm oil prices).