The rupiah is now touching its weakest level (against the US dollar) since August 1998, a time when the Asian Financial Crisis had left deep wounds in Southeast Asia’s largest economy as the financial crisis evolved into a social and political crisis and therefore the current rupiah level brings back painful memories for some (such the people, businessmen and policymakers). So far this year, Indonesia’s rupiah is one of the worst performing Asian currencies against the US dollar, weakening nearly 5 percent.

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.46 percent to IDR 13,022 per US dollar on Thursday (05/03).

Indonesian Rupiah versus US dollar:

| Source: Bank Indonesia

Bank Indonesia Governor Agus Martowardojo expressed that the rupiah is still in healthy condition as its weakening trend is not the result of internal financial troubles but more the result of worldwide bullish US dollar momentum. Although there is indeed truth in his words, it is important to note that Indonesia is still plagued by a wide current account deficit and which makes the country particularly vulnerable to capital outflows amid global shocks (such as a higher US interest rate environment that is expected to be implemented later this year). This year Indonesia’s current account deficit is expected to reach about 3 percent of the country’s gross domestic product (GDP).

On Thursday (05/03), the US dollar appreciated against most currencies across the globe as US Automatic Data Processing (ADP) showed that the private sector added 212,000 new jobs to the US economy in February 2015 (down from 250,000 in the preceding month), the US non-manufacturing purchasing manager's index rose to 56.9 in February, and higher US bonds' yields over the past couple of days (on increased liquidity in Japan and the European Union where central banks implement a looser monetary policy to boost their economies). Another factor that may be at play (placing more depreciating pressures on the rupiah) is that Bank Indonesia is expected to cut its benchmark interest rate (BI rate) further this year. In mid-February Indonesia’s central bank made a surprise move by lowering its BI rate by 25 basis points to 7.50 percent. Expectation of another interest rate cut encourages market participants with short term investments to exit from rupiah denominated assets.

Indonesian Finance Minister Bambang Brodjonegoro stated that the market (and analysts) should not only look at the performance of the Indonesian rupiah versus the US dollar, which has bullish momentum amid looming further US monetary tightening, but should also take into account Indonesia’s rupiah performance against other global currencies. Brodjonegoro added that one of the key issues to overcome a weak rupiah is to improve the country’s current account deficit. In fact, with a depreciating rupiah, the country’s trade balance should improve automatically as imports become relatively expensive while exports become more competitive on the global market. For example, Indonesian textile exporters feel the positive impact of the weaker rupiah as they sell their products in US dollars. Benny Soetrisno, official at the Indonesian Chamber of Commerce & Industry (Kadin), said that these textile companies can offset higher operational costs (due to higher minimum wages) by foreign exchange earnings.

Meanwhile, Bank Indonesia Deputy Governor Mirza Adityaswara said that the relatively weak rupiah value will not have a significant impact on Indonesia’s State Budget as a large chunk of generous and costly fuel subsidies have already been scrapped (made possible by worldwide low oil prices). Before these fuel subsidies had been wound down, the government would severely feel the impact of a weaker rupiah (against the US dollar) as oil imports are purchased using US dollars. Adityaswara added that domestic US dollar demand contributes to the recent rupiah depreciation.

It is estimated that foreign investors will start making losses when the rupiah hits IDR 13,100 per US dollar as currency losses offset yields of Indonesian assets.